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Self Managed Super Fund (SMSF) Article
Understanding the rules of retirement
By Tony Negline.
This article may be out of date.
7th May 2008
The only way a investor can gaining access to their preserved super assets is to satisfy what the super laws call Conditions of Release.
In total there are 16 Conditions of Release. Most of us will only need one of these – namely the definition of retirement.
There are four different definitions of retirement which revolve around an investors age. There is one rule for those aged at least 65, one rule for those aged between 60 and 65, another rule for those aged between 55 and 60 and finally those aged less than 55.
Once a person reaches their 65th birthday, the retirement Condition of Release allows them full access to their super assets.
An investor however doesn't actually have to take their money out of the system. One of the many sensible reforms introduced by the Howard Government under its Better Super changes was to allow investors to keep money inside the super system until the investor dies when the assets must be paid out of the system. This means it is possible for a person over 65 to leave money in the accumulation part of their super fund during their retirement
This does not mean the deceased's super assets have to be paid as a lump sum. Death benefits paid to deceased's dependents can be paid as either a lump sum or pension. Dependants include the deceased's spouse, any child or any other person deemed to be a dependent of the deceased. All others are non-dependents and death benefits can only be paid as a lump sum.
Why do the assets have to be paid out on death? In the long-term the government does not want to provide overtly unlimited and multi-generation access to the superannuation tax concessions.
The vast majority of people who stop work before age 65 cannot survive financially without accessing some or all of their super monies. However access to super assets before age 65 does not happen automatically. It depends upon your age when you first want to get access to your benefits and how you want to take those benefits.
An investor aged at least 60 but under 65 have two potential retirement rules that can apply before they are considered retired and access to super assets is allowed.
The first of these rules says that if the investor has terminated gainful employment after reaching age 60. If a person who is older than 60 has more than one job they simply need to stop one of those jobs to access their super assets. As a result it’s common to hear of people getting small part-time jobs which are terminated after a short period of time. Whether such arrangements are legitimate is always a difficult issue. A super fund should demand documentary proof that a retiree has actually ceased work.
The second says that the trustee is reasonable satisfied that the investor had already ceased gainful employment before age 60 and never intends to become gainfully employed for less than 10 hours each week.
These definitions always cause a great deal of confusion. Gainful employment means that you provide your mental or physical labour and receive some tangible reward for your efforts.
The trustees of many large super funds will not permit access under this rule until the member has personally signed a written declaration stating that they satisfy the access rule. Some funds demand appropriate documentary proof. Anyone running their own super fund should have a similar documentary trail to show that all necessary rules have been followed.
Does making such a strong declaration preclude you from ever working again? Strictly no. Some people make this declaration and then the next day, week or month return to their former job without any change.
In some circumstances people quickly realise they retired too soon and return to what they were doing. For others it takes them awhile to decide that work wasn’t too bad after all and then decide to return to the fray. In the majority of cases however people are making the declaration whilst having a strong preference of returning to work. Their principal motivation is to have flexibility and not be bound by what they think is bureaucratic nonsense.
Once a person turns 60 all super benefits become tax-free so why are these retirement definitions important? Breaching these preservation rules is often considered a serious offence so it would be foolish to risk penalties just because organising the documentary trail seems like too much of a bother. In particular the tax laws contain a particularly neat trap. Any super benefit paid which breaches the super laws is added to your income for tax purposes and taxed at the normal individual tax rates. No tax-free super for you!
If you were born before 1 July 1960 and you stop work before you turn 60 and you want access to your super after turning age 55 and before turning 60, then you must be able to satisfy your super fund’s trustee that you stopped gainful employment (that is, employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment) and you never again intend to be gainfully employed for more than 10 hours each week.
Finally those who are less than 55 cannot gain access to their preserved super because of retirement.
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