COVID-19 may favour preservation age ‘retirees’

Further, Ms Heffron said individuals over the age of 60 can immediately start 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.

However, she added that if they are still looking for work, every dollar of superannuation that builds up after they lost their job (e.g. 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 (TRIS) with no equivalent tax break on fund earnings,” Ms Heffron said.

Source: ATO

For preservation age individuals who already have a TRIS, Ms Heffron said this is one scenario where the pension does not automatically become a retirement phase pension.

She said that, 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 $1.6 million at the time the individual lost their job,” Ms Heffron said.

“Given that the pension will be checked against their transfer balance cap (TBC) 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 $1.6 million limit first and then convert across to a retirement phase pension.”

Even for preservation age individuals below the TBC, Ms Heffron said a good strategy would be to take the full year’s minimum pension before the TRIS is converted to a retirement phase pension, meaning the amount withdrawn never counts towards the $1.6 million transfer balance cap.

Even in an SMSF, she said 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),” Ms Heffron said.

CORRECTION: An earlier version of this article stated "Ms Heffron said individuals of preservation age can immediately start a 'retirement phase pension'.”. This is incorrect. It should state 'individuals over the age of 60'.