Tax in retirement - what you need to know

3 min read

When thinking about retirement, tax might be the furthest thing from your mind. 

While that might be the case, being informed about tax in retirement could have its financial benefits.

Super is a tax-effective means of accumulating wealth for retirement. For starters, it has low levels of entry tax (with 15% of the money coming from an untaxed source and tax-free if the contribution is made with after tax money), concessional contributions tax and a discount on any capital gains. The tax benefits are even more pronounced when you retire from the workforce.

While financial decisions about retirement may seem endless, being armed with knowledge on tax in retirement may help ease the decision burden by enabling you to make an informed one.

What are taxable and tax-free components?

Taxable components of a super balance generally include concessional contributions (such as personal deductible contributions, salary sacrifice and employer contributions) and earnings within the super account. Tax-free components include personal non-concessional (after-tax) contributions, downsizer contributions and the government co-contribution.

Will you take super as a lump sum or income stream?

Super benefits – lump sum

Should you look to take your benefits as a lump sum you’ll need to identify whether your fund is a taxable fund or an untaxed fund.

Typically, a taxable fund will withhold contributions tax on contributions from a taxed source (such as, employer contributions), while an untaxed fund won’t.

If your super is in a taxed fund and you’re over age 60 when you take a lump sum withdrawal, it will be tax-free, regardless of the components.

If you’re over your preservation age but under 60, the tax will depend on the components of your fund. While the tax-free portion will be tax-free, the taxable component can be concessionally taxed at 0% up to the low rate cap amount, currently at $235,000 (2023/24).

Any taxable component withdrawn above this limit will be taxed at a maximum of 17% (including Medicare Levy) or your marginal tax rate, whichever is lower.

Remember, the low rate threshold is a lifetime limit and is indexed periodically in line with wage growth. It’s worth also considering that any earnings within the accumulation phase (the phase in which superannuation savings are accumulating while a person is working) will attract a maximum tax rate of 15% while any long term capital gains will be taxed at 10%.

While the tax concessions relating to super lump sums are generous, you’ll need to consider future tax impacts of where you place your super lump sum after you’ve withdrawn it.

Super benefits - Income stream

Alternatively, you may choose to take your super as an income stream. If you are in a taxed fund and you are over age 60 when you commence your income stream, the income will generally be tax-free, regardless of the components.

In fact, the income is non-assessable non-exempt income, so it won’t even be recorded in your tax return.

If you over your preservation age but are below 60 then the components of your super will determine how much tax you will pay. The income will be drawn proportionately based on the tax-free/taxable components within the fund. The portion of tax-free income will be tax-free while the taxable portion will be included in your taxable income and will attract a 15% tax offset.

Earnings and capital gains within your income stream will attract a 0% tax rate on up to your transfer balance cap (the general transfer balance cap is $1.9 million for 2023/24 - you may have a personal transfer balance cap which can differ from the general transfer balance cap due to timing and indexation impacts). Transfer balance cap is a limit on how much super can be transferred from your accumulation super account to a tax-free ‘retirement phase’ account.

The rules for untaxed funds are a little bit different and it’s best to talk with your fund to understand the exact treatment as it can vary from fund to fund.

Transition to retirement

While some people jump straight into retirement, others choose to transition into it. The possibilities of work hours, amount salary sacrificed and income drawn from the transition to retirement income stream (TRIS) are limited only by your imagination.

Under the rules, you may be able to convert some or all of your accumulated super benefits into a TRIS once you reach your preservation age.

Although a TRIS provides flexibility to alter your working patterns as you approach retirement, income is generally limited to between 4-10% and the tax in retirement will depend on your age. If you’re 60 and over, the income will generally be tax-free. If you’re between your preservation age and 59, the components of your super will dictate how it will be taxed. The proportion of your income that comes from a tax-free component will be returned to you tax free, while the proportion that relates to the taxable component, will be included in your taxable income and taxed at your marginal tax rate less a 15% tax offset.

Unlike a full retirement income stream, the earnings within the TRIS will be taxed at 15% regardless of the date the TRIS commenced.

Whatever your retirement plans are, understanding tax in retirement can help ease the burden of the financial decisions you’ll need to make.  While super can be considered tax-effective, not all strategies will leave you better off. Talking to a professional financial adviser is a great step toward cementing a secure financial future.  

Next: How much will you need to enjoy your retirement?

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Things you should know

The article was prepared by Bryan Ashenden, Head of Financial Literacy and Advocacy and is current as at 1 July 2023.

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. 

Any tax considerations outlined in this publication are general statements, based on an interpretation of the current tax law, and do not constitute tax advice.  The tax implications of super investments can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.