Pension Drawn While Member Still Working
Deng is 66, retired from full-time work in 2022 but has since taken a part-time consulting role earning $60,000 a year for about 15 hours a week. He is the sole member of an SMSF with assets of $2.4 million. In July 2024 the trustee commenced an account-based pension of $120,000 a year, paid monthly. Deng also salary sacrifices $20,000 into the fund. In March 2025 the auditor queries whether the pension is valid and whether the fund can claim an exemption from tax on pension assets. The trustee says that because Deng is over 65, no work test applies and the pension is automatically valid. The fund's trust deed permits pensions but requires a member to have met a condition of release.
1. Is Deng eligible to commence and continue the pension, and does the work test matter here?
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The work test is not the relevant gateway for an account-based pension; the condition of release is. Deng is over 65, so he satisfies the retirement condition of release under the regulations once he reached 65, regardless of his consulting work. The work test applies to personal contributions for members aged 67 to 74, not to pension commencement. So the trustee's conclusion is right but for the wrong reason. The deed requires a condition of release to be met, and it is met by age. The pension is therefore validly commenced. The consulting income does not cause the pension to cease. The adviser should document the condition of release relied on and confirm the deed does not impose a stricter requirement, such as full cessation of work, which would need to be checked before the first payment.
2. Explain the tax treatment of the fund's income and the minimum pension standards that apply for 2024-25.
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Because the fund is paying a pension to Deng, it can claim the exempt current pension income exemption on income supporting the pension liability. The fund must obtain an actuarial certificate or use the segregated method; with a single member and a pension interest, the trustee should consider whether assets are segregated. The exemption applies only to the proportion of income attributable to the pension. The minimum annual payment for a 66-year-old is 5% of the account balance at 1 July, so at least $120,000 on a $2.4 million balance; his $120,000 is exactly at the minimum and leaves no buffer. If the balance falls, the minimum falls, but if a payment is missed the fund loses the exemption for that year and the pension may be treated as ceasing. Payments must be made at least annually, and the trustee should document the calculation and timing. Salary sacrifice contributions remain concessional and are taxed at 15%.