Returning to work after starting a pension | Accurium

Three age groups

Once eligible, it is common for a self-managed superannuation fund (SMSF) to commence paying a retirement phase income stream to a member, in order to start drawing down on retirement savings and access the exempt current pension income (ECPI) on fund earnings. This article will consider what happens to an SMSF member’s income stream and other superannuation interests if they subsequently return to work.

Conditions of Release:

In order to be eligible to commence a retirement phase income stream a fund member must first meet a condition of release. 

The most common conditions of release for paying benefits include a member:

  • reaching preservation age and retiring with no intention of ever working again,
  • ceasing an employment arrangement on or after age 60, and
  • reaching age 65 (even if the member has not retired).

When any of these conditions of release are met the member’s preserved or restricted non-preserved benefits will change to unrestricted non-preserved benefits. The member could then request that their SMSF pay some or all of their benefits as a retirement phase income stream. The unrestricted non-preserved benefits in accumulation phase can also be withdrawn directly as lump sum payments.

If the member had previously commenced a transition to retirement income stream (TRIS) while still working (after reaching preservation age) then their TRIS will change from a non-retirement phase income stream, to being in retirement phase once the SMSF trustee is informed the member has met a condition of release. The retirement phase TRIS has no cashing restrictions or maximum payment restrictions, it is like a regular account-based pension - subject to restrictions documented in the SMSF trust deed or pension documents. 

Returning to Work:

Returning to work after a condition of release has been satisfied does not impact the preservation status of superannuation benefits that have already been classified as unrestricted non-preserved due to previously meeting a condition of release. 

Whether returning to work impacts the accessibility of future earnings and contributions depends on the member’s age. 

For a member aged between preservation age and age 60 the relevant condition of release to pay benefits is to retire with no intention of working again. However, a person’s circumstances can change and although they did not intend to work again at the time they retired there may be some instances where a member does return to work in the future. If a member does return to work their superannuation interests, which became unrestricted non-preserved due to meeting a condition of release previously, will remain unrestricted non-preserved. If the member has a retirement phase income stream it will remain in retirement phase with tax free earnings. However, any new funds the member contributes and any future earnings on accumulation interests will be preserved benefits unless the member once more retired with no intention to work again.  

The situation is similar for a member who is at least age 60 but not yet aged 65. For this age group the relevant condition of release is having ceased an employment arrangement. The difference here is that the member is only required to cease one employment arrangement to meet the condition of release, not cease all gainful employment and retire with no intention to work again. This means that a member can have two employment arrangements and if they cease one of them this would meet the relevant condition of release. Similarly, the condition of release would be met if a member ceased a current employment arrangement in order to commence a new job. In this situation, the condition of release is met at the time they cease the employment arrangement and any preserved benefits will convert to unrestricted non-preserved benefits at that time. Any further earnings or contributions received into accumulation phase from that time will again be preserved until another employment arrangement is ceased.

A member who has reached age 65 can return to work without needing to worry about the preservation status of any new earnings or contributions to the fund. As attaining age 65 is a condition of release all of the member’s current and future superannuation benefits will be unrestricted non-preserved benefits, no matter the member’s working status. The member can commence new retirement phase income streams and make lump sum withdrawals as they wish.

Case study:

On 1 July 2019, Clive was 58-years-old and working full time. Clive was the sole member of his SMSF and his superannuation benefits were being paid as a TRIS. As he had not yet met a condition of release the TRIS is in non-retirement phase and the SMSF is not currently eligible to claim ECPI. 

On 23 October 2019, Clive chose to retire and had no intention to work again, he informed his SMSF of this on 9 November 2019. Upon informing his fund of meeting the condition of release Clive’s TRIS converted from non-retirement phase to retirement phase and fund earnings became tax free from that time onward. A transfer balance account report (TBAR) was submitted to the ATO to report the TRIS converting to retirement phase on 9 November 2019. 

A few months after retirement Clive received a job opportunity he could not pass up and decided to commence working again. As a result of commencing this new employment arrangement on 15 January 2020 any new amounts contributed to the fund will create a new accumulation balance and will be preserved benefits. Clive still has the option to commence a new TRIS with the amounts he contributes after returning to work but this would be a non-retirement phase TRIS until another condition of release is met by Clive. Clive’s existing TRIS will remain as unrestricted non-preserved benefits in retirement phase. There is no requirement to commute the balance or cease the income stream.

Conclusion:

Returning to work in retirement for members aged under 65 will generally mean future contributions and earnings become preserved benefits in the SMSF. When considering a return to work members should consider the impact on the preservation of their superannuation benefits and their ability to make benefit payments. In particular, care should be taken to identify what benefits are unrestricted non-preserved versus preserved, in order to avoid accidentally withdrawing preserved benefits from the fund. 


Disclaimer

This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.