Heffron | Retiring before preservation age

Retiring before preservation age

Those lucky enough to retire early – well before their preservation age – are often confused about when they can access their superannuation.

Imagine selling a small business at age 50, for example, and deciding never to work again.  While superannuation is not likely to be absolutely front of mind after that event, it still pays to understand the rules for the future.

Firstly, superannuation is not accessible immediately (ie at age 50) in any form unless there is some other circumstance that gives access (eg incapacity, terminal medical condition, compassionate grounds, financial hardship etc).  The earliest this individual’s superannuation will be accessible is their preservation age – 60 in this case.

Once they reach 60, they can clearly access their superannuation.  The key question is whether or not it will be available in any form (lump sum, account-based pension) or only a transition to retirement income stream.

This all comes down to their intentions for the future.

If they seriously never intend to work again, they meet one of the two retirement definitions.  This one is satisfied if all of the following are true:

  • the person has reached their preservation age (60 in this case),
  • an arrangement under which they were “gainfully employed” has come to an end, and
  • the trustee is satisfied that they never intend to work 10 or more hours per week in the future.

Importantly, there is no requirement (for this particular definition) that the employment arrangement ended after their 60th birthday or even recently.  The case of the small business owner selling up and retiring at 50 would be fine here, providing they genuinely don’t intend to work in the future.

Meeting the retirement definition means superannuation can be accessed in any form.  Any pension that starts will not be a transition to retirement income stream, it will be a full account-based pension from the start.

Note that they have to have been “gainfully employed” (which includes being self employed) in the past at some point.  Our small business owner will clearly satisfy this requirement as long as, say, they actually worked in the business and were remunerated for that work, and didn’t just hold shares in the company that owned it.

However, someone who has never been employed at all would not. They can’t meet the second condition above (an arrangement under which they were gainfully employed has ended).

Their only option at 60 (preservation age) would be to start a transition to retirement income stream.  If they want full access to their superannuation (eg to pay a lump sum) that would have to wait until they turn 65.