Can your client retire despite receiving income protection benefits?

18 Nov 2021

Annie Dawson

Senior SMSF Technical Specialist

Being regarded as “retired” for superannuation purposes has some very important benefits. Not only will an individual be able to access their superannuation benefits, including being able to withdraw lump sum payments, but they will be eligible to start a “retirement phase” pension, which may result in a tax exemption on some or all of a fund’s investment income

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But what if a member is in receipt of an ongoing benefit from an income protection policy? Can they qualify as retired? Or if the benefit under the policy is payable to say age 65, will they have to wait until age 65 before they can commence a “retirement phase” pension?

Let’s look at what “retirement” for superannuation law purposes means. 

Firstly, a member has to be at least their “preservation age”. The preservation age has slowly been increasing from age 55 to age 60. For members born on or after 1 July 1964, their preservation age is 60. For members born prior to 1 July 1960, their preservation age is 55. And for everyone else, their preservation age is somewhere between 55 and 60. 

If the member has met their preservation age but is less than age 60, to be regarded as “retired”, the member needs to have met two criteria:

  1. ceased a gainful employment arrangement, and
  2. intend to never again be gainfully employed for 10 or more hours a week

Remember, for members less than age 60, it doesn’t matter when they ceased the arrangement under which they were gainfully employed (it could have been in their twenties!), only that they have. 

For members in receipt of a benefit under an income protection policy, a cessation of gainful employment is often observed in these instances. Often the insured person is not able to perform their usual duties and is not otherwise employed or contracted to work in any occupation. Their accrued leave entitlements have been paid out and the member no longer has an employment contract with their employer. 

But that’s not always the case – sometimes the member is unable to work but hasn’t officially terminated their employment. That’s OK – if the member has terminated a gainful employment position in the past then the first element has still been met.

If the member was self-employed and hadn’t previously ceased to be gainfully employed, they would need to sell or wind up their business to be regarded as having ceased a gainful employment arrangement.

The second element requires the member to have the intention to not become gainfully employed again for 10 or more hours per week. Gainfully employed refers to a person being employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Whilst income protection benefits are akin to salary and wages (and are assessable as income), the member is receiving the payment as part of a contractual arrangement with the insurer, not because of their personal exertion. As such, it is possible for a member to meet the second element – i.e. intend to never again be gainfully employed for 10 or more hours per week – even if they are in receipt of insurance benefits.

If the member has met their preservation age and is between age 60 and 65, to be regarded as “retired”, they will need to meet the same conditions above, or alternatively, if they have left an arrangement under which they were gainfully employed after age 60, this will be sufficient.

But before a client triggers the condition of release of ”retirement” and commences a retirement phase pension, it is important the member seeks advice to ensure their change in circumstances, such as declaring they are permanently retired or commencing a pension, does not adversely impact their entitlements under the income protection policy.


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