Accumulated through compulsory and voluntary contributions as well as earnings, super is a significant source of retirement savings. As clients approach retirement, their minds often turn from accumulating to accessing their super, be it through either an income stream, lump sum or a combination.
To access super, clients need to meet a condition of release. Upon meeting a condition of release, super can be classified as unrestricted non-preserved, enabling further financial planning strategies related to accessing super.
Retirement is widely understood to be an event which enables access to super, however, there are some legislative nuances when it comes to the specific definition of retirement. In this article, we focus on retirement related condition of release and address some frequently asked questions.
There are other related issues when it comes to accessing super. It is outside the scope of this article to discuss any tax related issues which may go hand in hand when accessing super. For example, Transfer Balance Cap implications upon commencing income streams and tax issues relating to accessing super for those under 60 are some common tax issues to consider, which are not discussed in this article.
Definition of retirement in superannuation law
Until a client reaches age 65, there are two definitions of retirement depending on whether the client is under or over age 60.
Client has reached their preservation age and is less than 60
Preservation age is the earliest time at which super can be accessed under the retirement definition and will gradually increase to age 60 for those born on or after 1 July 1964. For those born between 1 July 1962 and 30 June 1964 (inclusive), clients have a different preservation age depending on their date of birth, which is outlined on the following page.
Table 1: Preservation age based in date of birth
|Date of birth||Preservation age|
|Before 1 July 1962||Already attained|
|1 July 1962 to 30 June 1963||58|
|1 July 1963 to 30 June 1964||59|
|From 1 July 1964||60|
Retirement occurs when an arrangement under which the client was gainfully employed1 has come to an end and the super trustee is reasonably satisfied that the member intends never to be gainfully employed for ten hours or more per week in the future.
Advisers often ask whether retail super funds require any proof around termination of employment and clients’ intention to no longer be gainfully employed. Unique rules aside, most super funds simply require a member to make a declaration, often by indicating through the withdrawal form that they are retired.
Client has reached the age of 60
If the client is age 60 or over, retirement definition is easier to meet. The client is no longer required to make a declaration that they don’t intend to be gainfully employed in the future. Instead, retirement definition is simply met upon termination of a gainful employment arrangement. It is of no consequence that the client may still intend to be gainfully employed in the future or indeed where the client had multiple employment arrangements, continues to work.
Importantly, in this circumstance, the amount of funds which can be accessed are the accrued entitlements on the day of termination of gainful employment. Any further contributions after the termination of gainful employment are required to be preserved and a subsequent condition of release is required for access to those funds.
From a practical perspective, some retail super funds may not enquire about the termination date. Where no termination date is required by the super fund for their withdrawal process, practically, the super fund may unrestrict the entire balance at the time the withdrawal form is completed.
Where super funds do require a termination date, they may use that date to allow access to the funds under the retirement definition, with any new contributions and earnings after that date being still preserved until any future condition of release is met.
Even if the client is over the age of 60, they can still use the retirement definition relating to ceasing a gainful employment arrangement and not intending to be gainfully employed for ten hours or more per week.
Having to contend with the retirement definition for those who have reached their preservation age and continue to work is made much simpler upon reaching age 65.
Reaching age 65 is a defined condition of release. It does not matter if the client continues to work more than ten hours a week. Upon reaching age 65, clients can access their super which can open up many opportunities for the usual financial planning strategies.
Access to Transition to Retirement Income Streams
Once a client has reached their preservation age outlined in Table 1, they could access their super in the form of a non-commutable income stream with a pension payment limit of 10% of the account balance each financial year, if any of their funds are preserved without having to meet any other condition of release.
Upon reaching age 65 or meeting the retirement definition prior to turning 65, the 10% payment limit is removed, and one could access their entire balance.
ATO’s scrutiny on declaration of retirement
Since 1 July 2017, with Transition to Retirement Income Streams (TRIS) not in retirement phase subject to up to 15% tax on their earnings, the Australian Taxation Office (ATO) has repeated their intent to scrutinise declarations of retirement to commence retirement phase income streams where the earnings are tax-free.
Of particular interest to those who are gainfully employed through a related trust or company, the ATO has stated that even if an individual ceases to be gainfully employed through a controlled trust or company but continues to perform substantive duties and is remunerated through passive mechanisms such as distributions or dividends, it may put into question whether a person has met the retirement definition.
My client, at the age of 59, retired with no intention to work in the future. As time transpired, their intentions changed after a year of retirement. Are there any concerns around their previous declaration and is there any change to the unrestricted non-preserved status of their super?
As imaginable, with passing of time, for some clients, their intentions can change. Maybe they tried retirement and they truly did drive their significant other half crazy, or maybe they established that weren’t fully ready for retirement.
It is permissible to have a change of intention, as long as the original declaration of retirement was genuine and the intention to retire was not contrived to access super, including commencing retirement phase income streams.
Upon recommencing any future employment, funds in accumulation phase previously characterised as unrestricted non-preserved remain as such. Any previously commenced retirement phase income streams also remain as such. Future contributions and earnings in accumulation phase from the subsequent employment and any voluntary contributions remain preserved until a further condition of release is met.
My client read somewhere that upon reaching age 60, they can access their super. That’s not true is it?
Since 1 July 2007, the headline message that super is tax-free for people over 60, has sometimes given rise to a misconception that super is also automatically accessible at age 60 without meeting the retirement condition of release. With the exception of accessing super through a TRIS, turning age 60 does not automatically constitute retirement.
1 Defined as employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.