When does retirement really mean retirement?

It’s well known that the super law has two definitions of retirement – one relates to leaving a job after 60 and one is about winding down more permanently. But the actual timing (and implications for accessing super benefits) is often poorly understood.

For years we’ve talked about the “permanent retirement” definition applying from preservation age while the “leave a job after 60” option is only available – not surprisingly – after age 60.

But in fact, that difference in age is fast becoming redundant. Only people born before 1 July 1964 have a preservation age that’s younger than 60. And in a few months’ time even the youngest people in this transitional group will, in fact, be 60 (someone born on 30 June 1964 will turn 60 this year). So for all intents and purposes, 60 is basically the age for both of these tests.

As with any test relating to preservation, it’s what’s happening “right now” that matters. That can mean that some conditions of release (including retirement) are never actually permanent, they have to be reassessed each time we want to know if the super is preserved.

Of course this isn’t true for something like turning 65. Someone who is 65 once is at least 65 forever.

But when it comes to leaving a job (or more correctly, terminating an arrangement under which the member was gainfully employed) after 60, this will only happen once, at that moment in time. On that day, the job change will free up all the member’s super built up so far and it can all be reclassified as unrestricted non preserved. That’s generally true for all super everywhere, even super that has nothing to do with the particular job that has ended.

And those dollars stay that way – even if the member goes directly to another job, that doesn’t change the fact that they now have a lot of unpreserved super.

But if the member’s balance goes up by $1 the next day, that $1 will generally be preserved. That’s because we don’t look backwards for this definition, we just look at what is happening in the moment. Are they leaving another job today? If not, well today’s super is preserved. The same would apply to any new contributions.

The one exception is where the member chooses to put all their unpreserved super into a retirement phase pension. In that case, all subsequent earnings (but not new contributions to their – separate – accumulation account) are unrestricted. That’s just a special carve out provided for pensions.

But if that pension included any preserved super, the dynamic changes. For a start, the pension would be a transition to retirement income stream not a retirement phase pension. Of course that has an enormous impact when it comes to the transfer balance cap and the tax exemption on the fund’s investment income (neither of which are relevant for a TRIS). But it is also profound for preservation. Earnings that build up within a TRIS are all preserved. That’s even if most of the initial amount put into the pension isn’t preserved.

It's easy to think about the “leaving a job after 60” definition as being transient. But technically the same applies for the “permanently retired” definition. It’s just that it’s easier to meet that every day.

Remember under this definition, the member must have:

• ended a gainful employment relationship at some point (not necessarily “today”), and
• be able to state to the trustee of their fund that they never intend to be gainfully employed 10 or more hours a week again.

So this one is easier for a member to meet every day because it’s a simple matter of: can they continue to make that declaration?

Often they can. But that’s key – if their circumstances change, for example:

• they end up going back to work (or in fact, simply decide to go back to work),
• their unpaid work (which is not gainful employment) becomes paid (in which case they are now gainfully employed, possibly 10 or more hours per week), or
• their hours of work increase back up to 10+ per week

they will immediately stop meeting the retirement definition. While we often talk about this definition of retirement as being “permanent retirement”, it can be surprisingly impermanent.

And so what happens when someone in this situation stops being retired?

Once again, their existing super doesn’t go back to being preserved. Once super has been reclassified, it stays that way. But subsequent earnings, contributions etc will be preserved until the member retires again or turns 65. The only exception would be, again, putting all the unrestricted super into a retirement phase pension. Earnings building up within retirement phase pensions are always unrestricted.

Why do we care?

Often people look to carry out transactions like recontribution strategies around this time, or start pensions. It’s really important to understand the transience of retirement if part of the strategy is, for example, to withdraw (from unrestricted super) and recontribute (which will make it preserved again – unless the member still meets the permanent retirement definition).

And of course retiring means a TRIS can be converted to a retirement phase pension – with the sought after tax exemption on the fund’s investment income. That actually comes with some unique timing challenges of its own!

We’ll be discussing those rules, together with retirement generally in our forthcoming 'Retirement Income' Masterclass. This is exactly the sort of topic that will be relevant to most of your clients one day – register now to pick up some valuable practical tips from Annie Dawson and Lyn Formica.