Tax in retirement - what you need to know

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.

At retirement the tax paid on any withdrawals from super will depend on these components, your age at the time of the withdrawal and whether you drawdown as a lump sum or income stream.

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

Upon satisfying a condition of release (most commonly the earlier of, being over age 60 and retired or attaining age 65), you may choose to access your super as a lump sum and/or an 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.

Any taxable component withdrawn below the age of 60 will be taxed at a maximum of 22% (including Medicare Levy) or your marginal tax rate, whichever is lower.

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 are below age 60 then the components of your super will generally 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. You may also receive a 15% tax offset if you hold a permanent incapacity income stream.

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 2024/25 - 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. There are a number of variations to the number of work hours, amounts salary sacrificed and income drawn from the transition to retirement income stream (TRIS), limited by your concessional contribution caps and the following rules relating to TRIS accounts.

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. From the age of 60, the income will generally be tax-free.

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?