Retirement in a Covid-19 world – Part 1

13 May 2020

Meg Heffron

Managing Director

Sadly many have lost their jobs during Covid-19. Obviously there have been temporary changes to superannuation conditions of release as a result of the pandemic (read our earlier article). But what about those who are over preservation age, may not work again and are looking for something more substantial or long lasting when it comes to accessing their super? There have been no changes to the definition of “retirement” but how does this work in a Covid-19 environment?

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First, remember that anyone over 65 can access their superannuation in full no matter what – they could be working full time, unemployed but looking for work or have lost their job and undecided about what’s next. Regardless, simply turning 65 gave them full access to their superannuation.

What about those over age 60 but have not yet turned 65?

Anyone in this group that loses a paid job is immediately classified as “retired” for superannuation purposes. It makes no difference if they immediately look for new work or even if they find it. The fact remains that ending a paid job after turning 60 means they experienced a retirement event that freed up access to all the superannuation they held at that time.

If they immediately start a pension with their superannuation this will be a “retirement phase pension” – triggering all the normal tax concessions including a tax exemption on some or all of the superannuation fund’s investment income.

Remember, though, that if they are still looking for work, every dollar of superannuation that builds up after they lost their job (eg investment earnings added to their superannuation account) will be preserved. 

If they start a pension with even $1 of preserved superannuation, the entire pension is a transition to retirement income stream with no equivalent tax break on fund earnings.

What if they already had a transition to retirement income stream? 

Remember that this is one scenario where the pension does not automatically become a retirement phase pension. Technically this happens when the individual formally notifies the trustee that they have experienced a retirement event. In an SMSF, of course, the notification can be immediate and the TRIS can become a retirement phase pension with no delay. But sometimes there is merit in a short delay – perhaps the TRIS was worth more than $1.6m at the time the individual lost their job. Given that the pension will be checked against their transfer balance cap on the day it becomes a retirement phase pension, they may want to re-organise their affairs to get the balance back down to the $1.6m limit first and then convert across to a retirement phase pension.

Even for those below this limit there are some modest but nifty strategies to consider. 

For example, taking the full year’s minimum pension before the TRIS is converted to a retirement phase pension means the amount withdrawn never counts towards the $1.6m transfer balance cap.

Even in an SMSF the delay can be achieved by simply choosing not to notify the trustee about the job loss until after the necessary changes have been made. A member of an SMSF may even choose to delay the notification to the trustee until the next 1 July to avoid the cost of calculating their balance at a date other than 30 June (provided there would be little tax impact for the fund).

Unfortunately some of the scenarios which have played out during Covid-19 give over 60s the worst of all worlds.

Someone who has suffered a material reduction in working hours (even down to nil) but still retains their job and will return to work when their employer starts trading again does not meet this retirement definition. Of course, their situation is not as dire as it might be for others. They have reached their preservation age and can start a transition to retirement income stream to provide cash flow but it will not be a retirement phase pension with all the flexibility that provides.

The situation is also tricky for those who run their own businesses as sole traders or partners in a partnership. Again, simply winding back the business or even significantly reducing working hours does not constitute retirement if the person has every intention of returning to normal in the future. Unless the business is wound up, sold or (in the case of a partnership) the individual is formally exited from the partnership, there has been no “end” to their (self) employment.

Note that in both these examples, we indicated that the individual intends to try and return to normal work once the pandemic is over. That intention is important as it rules them out of the other definition of retirement. Anyone over preservation is entitled to classify themselves as retired if:

  • They have ended an arrangement under which they were gainfully employed (ie, a paid job) at some point in the past – potentially even many years ago, and
  • Never intend to be gainfully employed 10 or more hours per week again in the future.

In other words, someone who has experienced a material reduction in working hours in their paid job or self employment could potentially be retired in a superannuation sense if they specifically decided that things will remain that way after the pandemic. It would be vital to be able to support this claim though – an employment arrangement where the individual is described as being “stood down” clearly indicates an expectation (or at least a hope) that things will return to normal in the future.

One quirky situation that we do see applying here relates to those who take on temporary work – Woolworths and Coles are providing employment opportunities for many people who never envisaged themselves stacking shelves to support their families. Paradoxically, when that job ends, they will experience a retirement condition of release when it comes to their superannuation. Ending any paid job (no matter how small, how temporary and how distant from one’s “normal” work) triggers retirement for people who have already turned 60.

And what about that ever shrinking group that is over their preservation age but not yet 60? That’s a whole separate article.