There are several occasions when an ADF member or veteran might be entitled to a lump sum as a result of their service. Lump sum payments may include compensation for injuries sustained during service, financial support payments, and superannuation.
Lump sum payments can be worth hundreds of thousands or even a million dollars or more, so making sensible financial decisions when you’re the recipient is essential.
Several DVA payments, including Permanent Impairment Payments, Wholly Dependent Partner Payments, and Incapacity Payments, may be available to current and former ADF members. These can be made in instalments or as a lump sum.
- Permanent impairment payments are financial payments provided to veterans who have sustained long-term disabilities or injuries as a result of their service. They are based on a permanent impairment point system.
- Wholly dependent partner payments are financial support provided to the spouse or partner of a veteran who has passed away, recognising their dependency and loss of income.
- Incapacity payments are provided to veterans unable to work due to service-related injuries or conditions, ensuring they have financial support due to their incapacity.
Superannuation
Superannuation payments can also be made as pension payments or as a lump sum upon retirement or early release due to medical retirement. Learning how to budget your DVA pension payments can help you protect and grow your wealth in the long run. Some superannuation payments available as a lump sum include:
- The Defence Force Retirement and Death Benefits Scheme provides an optional lump sum benefit to retired or discharged members under certain conditions.
- The Military Superannuation and Benefits Scheme is a hybrid benefit superannuation scheme that provides retirement benefits and financial security for eligible ADF members.
- ADF super is the current ADF superannuation scheme providing retirement benefits for ADF members and veterans.
Maximising the value of your lump sum payment
Lump sum payments offer immediate liquidity, enabling members to address any urgent financial needs or invest in opportunities that may arise, such as property purchases, super contributions, or diversification of investments for long-term financial gain. Seeking advice from an experienced veteran financial adviser can help you maximise their value to meet your short—and long-term financial goals.
1. Set financial goals
The first step is to determine your financial objectives. Are you investing for retirement, debt repayment, home ownership, wealth accumulation or children’s education? Setting clear financial goals helps ADF members stay focused and aligned with their aspirations. Whether contributing to a super fund for a comfortable retirement, eliminating high-interest debt for better financial health or saving for a down payment on a home, each goal has its own approach. You can create realistic plans to guide their efforts by defining your goals and prioritising their importance.
2. Understand your risk tolerance and timeframes
Consider how comfortable you are with market ups and downs and possible losses. If you are younger or have a long-term investment plan, you might be okay with taking more risks for higher returns. If you are nearing retirement or have a short-term plan, you might prefer investments with a lower risk/return profile and lower volatility. Every individual has their own risk tolerance and investment goals that should be considered when making investment decisions. Some people are comfortable taking on more risk in exchange for potentially higher returns, while others value stability and prefer safer investments.
3. Diversify
Diversification of investments helps mitigate risk and maximise potential returns. Diversification can be achieved by investing across several asset classes, such as shares, property, fixed interest, and cash. This approach helps spread risk across different industries and geographic regions. A well-diversified portfolio can help protect against unexpected events or downturns in specific sectors or areas. For example, if you have all your investments in one industry and that industry experiences a downturn, your overall portfolio could suffer significant losses. However, if you have a diversified portfolio with investments in various sectors and regions, the impact of one industry’s downturn will be lessened.
4. Impact on your overall financial situation
When it comes to a lump sum payment, consider it in the context of your overall financial situation, including tax, social security impact, estate planning, family impact, spouse impact, ability to save and more. Investing can be a great way to grow wealth and achieve financial goals through the right asset allocation, but this will widely depend on your individual circumstance. For example, how much should you invest and how much would you like to use towards paying off a debt? These are important questions to consider before making any investment decisions. It is essential to have a comprehensive understanding of the financial impact to make decisions that align with your goals.
5. Seek help
It is important to have a solid plan to make the most out of receiving a lump sum payment. A financial adviser can assist you in developing a plan to optimise the money according to your goals and objectives, thereby setting you up for a better financial future. They will take into account factors such as your age, risk tolerance, and future aspirations to determine the best course of action, and importantly, keep you accountable to your goals along the way.
Choosing between a lump sum and periodic payments
Several benefits described above have periodic payment alternatives to receiving a lump sum. If you have to choose between the two, there are some considerations.
Some people prefer the idea of periodic payments as they need a regular cashflow and don’t want to make investment decisions. There can also be offsets as well as income and assets tests depending on the nature of the periodic payment.
However, choosing periodic payments may limit immediate access to a large sum, which could be a drawback for significant expenses or investment opportunities that require upfront capital. A lump sum payment may help eliminate non-deductible debt and save you considerable interest costs over the life of the loan.
There may be an impact to the family situation as well, such as Centrelink benefits changing due to lump sum payments.
The choice between lump sum payments and periodic payments hinges on your financial goals, discipline, what you are looking to achieve and how to get there. An experienced financial adviser can help you make informed financial decisions based on your situation.
What is a lump sum advance, and should you take it?
If you receive a pension from DVA and require additional funds for any purpose, you can get some pension paid below certain dollar thresholds as a lump sum advance.
A lump sum advance can be spent for different purposes, including unplanned car or house maintenance expenses, a fridge or washing machine replacement, or a medical-related expense. Depending on your circumstances, pension rate and previous advances, you can get up to three weeks of the maximum Service Pension rate paid to help meet various expenses.
Are lump sum payments taxable?
Some DVA payouts are taxable, while others may be exempt from tax. This can be complex and confusing, so seeking professional financial advice is essential before making financial decisions. The lump sum you receive may also affect other government benefits or entitlements, so you must consider all impacts before making any decisions.
Maximise the value of your lump sum payment
Proper financial planning can make it easier to make sound financial decisions, especially when it comes to lump sum payments. A trusted and experienced financial adviser such as National Service Financial can provide advice aligned with your risk tolerance and individual circumstances. We understand the complexities involved in payouts, as well as the crossover between CSC, DVA and the ATO for veterans and ADF personnel, and can guide you toward the best decisions for your financial future.