Q: My husband turns 60 in January. We have an SMSF and he is going to commence retirement phase. He is essentially retired and only worked 4 hours this financial year. But what if he decides to work again in six months’ time? The account-based pension allows for lump sum withdrawals which is very advantageous and would be our first choice as it gives more flexibility. My question is, which pension do we set up when he doesn’t know whether he will work again? What happens if you are drawing down an account-based pension and then you work?
A: The implications of retiring and starting a pension, and then returning to full-time or part-time work, depends on the intentions of the retiree at the point of retirement. Note that you will need to verify your individual circumstances with your accountant, financial adviser or the ATO.
We have divided your question into 3 questions:
- What happens if I return to work after retiring?
- What happens to my account-based pension if I return to work?
- What type of pension should I start?
Note: Since 1 July 2017, the amount of super that can be transferred to pension phase will be capped at $1.6 million (indexed) (for more information, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap.
1. What happens if I return to work after retiring?
‘Retired’ for the purposes of accessing superannuation benefits means the trustees of the individual’s super fund are reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis. Note that ‘part-time’ is defined as working up to 30 hours a week and a minimum of 10 hours a week.
Signing a retirement declaration doesn’t preclude returning to full-time work at a later date, or deciding to work part-time at a later date, if a person’s circumstances change. The declaration relates to the person’s current intention at the time of retiring. Personal or financial circumstances can change.
We explain what happens when you retire and then return to work in more detail in SuperGuide article Super for beginners, Part 9: If I retire and take my super, can I return to work?
2. What happens to my account-based pension if I return to work?
Assuming you had a current intention to retire, when you retired, then a condition of release has been satisfied to commence a super pension. The account-based pension can continue to be paid even if the retiree then changes his mind about remaining retired. The pension account is made up of unrestricted non-preserved benefits, which can be accessed at any time, subject to the rules of the super fund, and subject to the pension rules. You will need to check your specific circumstances with your super fund, your adviser or the ATO.
3. What type of pension should I start?
If you’re in a self-managed super fund, then you only have two choices in terms of pensions:
- You can start a transition-to-retirement pension (TRIP) while you’re still working provided you have reached your preservation age). You must withdraw a minimum amount and you can withdraw no more than 10% of your pension account each year (except a lump sum can be payable representing pension assets that are unrestricted non-preserved benefits, if applicable). If you’re not planning to retire and you’re under the age of 65, then a TRIP is the only pension option available.
- You can start a regular account-based pension, subject to reaching your preservation age AND retiring, or, alternatively, satisfying another condition of release. The main restriction on an account-based pension is that you must withdraw a minimum amount, and you can withdraw as much as you like.
Important: Effective since 1 July 2017, the Coalition government has removed the tax exemption on pension fund earnings financing a transition-to-retirement pension (TRIP). This change applies to TRIPs in place before July 2017 as well as TRIPs commenced on or after 1 July 2017. For more information on TRIPs see SuperGuide article TRIPs: 10 important facts about transition-to-retirement pensions.
Note: In the past, SMSF members could start defined benefit pensions (and retired members of older SMSFs may be receiving such a pension) but it is no longer possible to commence a new defined benefit pension.