Benefits can only generally be paid when a member meets a ‘condition of release’, which includes conditions such as ‘retirement’ or ‘attaining age 65’. The payment of most benefits is voluntary, although in the event of a member’s death, a compulsory payment must be made as soon as possible.
3 types of benefits
There are 3 types of benefits. They have different restrictions on when they can be paid:
- Preserved benefits: These benefits can only be accessed (paid out through a lump sum or payment of a pension) when a condition of release is satisfied.
- Restricted non-preserved benefits: These benefits can be withdrawn in the same circumstances as preserved benefits (that is, when a condition of release is met) but they can also be withdrawn when the member terminates their employment with that employer, which can be before preservation age. These types of benefits were most often created by a member making a contribution to an employer sponsored super fund prior to 1 July 1999.
- Unrestricted non-preserved benefits: These benefits can be paid to the member on demand. When a member has met a condition of release and elects to keep all or part of the benefits in the fund, these benefits are classified as unrestricted non-preserved benefits. Investment earnings while in the pension phase are allocated to this category.
When processing a rollover from another fund to your SMSF, the preservation status of the benefits is maintained.
Conditions of release
To access your SMSF’s preserved benefits or restricted non-preserved benefits, at least one of the conditions of release must be met. These are:
- Retires (SIS definition) and has reached preservation age
- Reaches age 65
- Terminates employment on or after age 60, irrespective of future work intentions
- Commences a ‘transition to retirement pension’
- Suffers a terminal medical condition
- Suffers permanent incapacity
- Suffers temporary incapacity
- Faces severe financial hardship
- Has compassionate grounds
- Is a temporary resident who is permanently departing Australia
It’s important to note that not all conditions of release allow members to access the full amount of their benefits as a lump sum.
Retirement and Preservation Age
A retired member cannot access their preserved benefits before they reach their preservation age. Your preservation age depends on when you were born:
The definition of ‘retirement’ also depends on a member’s age and, for a member under 60, their future employment intentions.
- Under age 60: provided the member has reached their preservation age, ‘retirement’ occurs when an arrangement under which they were gainfully employed has come to an end (this can have occurred at any time, including prior to their preservation age). As the trustee, you must also be reasonably satisfied that the member does not intend to be gainfully employed in the future for more than 10 hours a week. A signed statement from the member confirming their intent not to be gainfully employed should be obtained and retained by the trustee.
- After age 60: ‘retirement’ can occur when the member ceases an employment arrangement, irrespective of their intention to continue working. This means that from age 60, a member simply needs to leave a job to gain access to their accumulated superannuation benefit.
If a member aged 60 or older gives up one employment arrangement but takes up another, the member may cash all preserved and restricted non-preserved benefits up until the end of the former employment arrangement. Benefits relating to the new job remain preserved until a further condition of release is satisfied.
- Reaching age 65: there are no restrictions so a member may cash out their benefits at any time and any uncashed benefits are automatically converted to unrestricted non-preserved benefits.
Using a transition to retirement pension
A member who is under 65 and who has reached preservation age can start to access their super benefits through a transition to retirement pension without having to retire from the workforce. The aim of this type of pension is to encourage greater workforce participation by allowing people to reduce their working hours and supplement their reduced salary income by taking a pension from their super fund. However, there is no requirement to reduce working hours and, as there can be considerable tax benefits, many people working full time commence a transition to retirement pension.
Transition to retirement pensions are account based pensions and subject to the following rules:
- no more than 10% of the account balance at the start of the year can be taken out as a pension
- you must take at least the minimum annual payment as a pension (4% of the account balance from 2013/14) and
- benefits cannot generally be commuted (converted to a lump sum) unless another condition of release (e.g. retirement) is satisfied
Terminal medical condition
A member may access benefits as a lump sum if two doctors certify that the member is suffering from a medical condition that will likely result in death within 12 months.
Permanent incapacity means that the member is unlikely, because of physical or mental ill-health, to ever engage in gainful employment of the type for which the member is reasonably qualified by education, training or experience. At least two medical practitioners will need to certify this.
Subject to the governing rules of the fund, a member may access their benefits where you are satisfied that the member has temporarily ceased work due to physical or mental ill-health that does not constitute permanent incapacity. The benefit can only be accessed by the member as a non-commutable income stream for the period of the incapacity.
Severe financial hardship
Subject to the governing rules of the fund, benefits may be released on the grounds of severe financial hardship. Different conditions apply depending on the age of the member. If the member is under their preservation age plus 39 weeks, the member could potentially access a single lump sum payment of up to $10,000 in a financial year. The member would have to have received government income support payments for a continuous period of 26 weeks and the trustee would need to be satisfied that the member is unable to meet reasonable and immediate family living expenses.
If the member is over their preservation age by at least 39 weeks, the member could potentially access all their benefits. The member would have to have been in receipt of government income support payments for a cumulative period of at least 39 weeks since reaching their preservation age and additionally was not gainfully employed (for at least 10 hours per week) on the date of the application.
In very limited circumstances, benefits may be released on compassionate grounds when the member does not have the financial capacity to meet an expense, such as to pay for medical treatment for a life threatening illness, or to make a payment on a loan to prevent foreclosure of the member’s family home. Applications for approval of release on compassionate grounds must be made directly to the Federal Department of Human Services. Your fund cannot release any benefits without the approval of the Department.
Temporary residents permanently departing Australia
Individuals who have entered Australia on an eligible temporary resident’s visa and who permanently depart Australia can be paid any superannuation they have accumulated. Any payment will be subject to a special withholding tax. This condition of release does not apply to all possible non-residents, nor does it apply to Australian citizens and permanent residents.
PAYG tax on benefits
When a member takes a benefit, your SMSF may be required to withhold tax from the payment under the PAYG system. Typically, this will occur when the member is under 60 years old and receiving a pension. You will need to register for PAYG and remain registered until either the pension payment stops or the member turns 60.
Trustees may be liable if preservation rules are breached
One final note of caution, severe penalties can be applied if you allow a member to improperly access their super benefits in contravention of the preservation standards. Trustees may be fined and the super fund could lose its complying status.