Taxes in retirement: Are you paying more than needed?

It depends on the source of your income, but if you’re retired, aged over 60 and receiving a pension from your super fund then the answer is most likely no. 

Super pension payments, like the ones you would receive from an account-based pension or transition to retirement (TTR) pension, are generally tax-free from age 60. Any lump sum withdrawals from your super account are also generally tax-free after 60. 

Usually, all other forms of retirement income, including the government Age Pension, employment income and income from other investments, will be included as part of your taxable income. 

There are tax benefits in contributing to a super fund even before you retire. For instance, you generally pay less tax on contributions your employer makes on your behalf from your pre-tax income, such as any super guarantee and salary sacrifice contributions. What’s more, you usually pay no tax on contributions you make from your after-tax salary. 

If you’re retired and aged 60 or more, any income you derive from a super income stream such as from an account-based pension or super annuity will be tax-free. You may also be eligible for tax offsets such as the seniors and pensioners tax offset (SAPTO) to help offset tax on other income. 

When you meet a ‘condition of release’ – such as reaching age 65 or retiring after you reach your preservation age – you are allowed to access the money held in your super fund. How you do this will affect how much tax you pay and, ultimately, how much money you have left over for your retirement. 

Account-based pensions

The usual options for accessing your super are either making a lump sum withdrawal or setting up an income stream such as an account-based pension. Or you can do a combination of both. Which option you choose may affect how much tax you pay. 

For instance, if you set up an income stream, such as an account-based pension, the pension payments you receive will be tax-free from age 60. If you need to withdraw a lump sum from your account-based pension, such as to pay for a large one-off expense, the lump sum will also be tax-free from age 60. Finally, any investment earnings from the assets your pension account is invested in will also be tax-free. However, if you don’t fully spend your pension payments or withdrawals and then subsequently invest that money, such as in shares or property, any income you earn from those investments is included in your assessable income and may be taxable, depending on how much you earn and what tax deductions you may be able to claim.  

Case study

Transition to Retirement (TTR)

A transition to retirement (TTR) pension allows you to access your super while continuing to work. To be eligible for this, you must have reached your preservation age (between 55 and 60 depending on when you were born).

TTR pensions are non-commutable, which means you can’t withdraw a lump sum. The maximum amount of pension payments you can receive is capped at 10% of the account balance on 1 July each year. However, once you retire or turn 65 these restrictions no longer apply. 

The payments you receive from a TTR pension are taxed in the same way as an account-based pension. For example, from age 60 any pension payments you receive will be tax free. Before age 60, the amount of taxable component included in your payments will be included in your assessable income, and taxed at your marginal rate less a 15% tax offset. 

Investment returns on the assets used to support TTR pensions are taxed the same as other super fund assets, at up to 15% until you turn 65 or retire. From then the earnings are tax free, as they are for an account-based pension.

Tax considerations if you’re under 60

If you’re under 60 and contributing to a super fund then there may be tax advantages in making additional after-tax contributions or via making personal deductible contributions or salary sacrificing.

If you have reached your preservation age between 55 and 60, you may be able to access the funds in your super account as TTR pension without needing to be retired. How much you draw, the composition of your super (in other words, the proportion of tax-free and taxable funds) and the level of your taxable income will then determine how much tax you will pay. 

Tax considerations if you are 60 or older
 

If you are 60 years old or older your super payments may be tax-free. These payments can be in the form of a lump sum, income stream such as a pension, or a combination of both. 

If your only source of income is the Age Pension or a pension paid from a taxed super fund, you won't need to lodge a tax return. If you have other sources of employment or investment income then you will need to declare them and lodge a tax return.

Most super funds pay tax on your behalf for contributions or investment returns and the benefits you get from them are tax-free. There are other super fund arrangements, however, which may affect how much tax you have to pay on your super. 

Tax on capped defined benefit income streams

If you’re receiving either a capped defined benefit income or have a certain type of defined benefit pension, you can receive up to $118,750 tax free.  

If your pension payments exceed this amount (the defined benefit income cap), 50% of the additional money will be included in your assessable income and you may need to pay tax.  

Your fund will send you a tax statement to help you.  

Tax on capped defined benefit income streams

If you’re receiving either a capped defined benefit income or have a certain type of defined benefit pension, you can receive up to $118,750 tax free.  

If your pension payments exceed this amount (the defined benefit income cap), 50% of the additional money will be included in your assessable income and you may need to pay tax.  

Your fund will send you a tax statement to help you.  

Tax on self-managed super funds (SMSFs) 

If you’re aged more than 60 years and receiving a pension benefit from an SMSF, either in the form of a lump sum or income stream, then you’ll likely pay no tax. If the benefit is from a capped defined benefit income stream payable from the fund, the defined benefit income cap applies, and you may need to pay tax.

Untaxed super funds

Some government super funds called constitutionally protected funds (CPFs) are untaxed super funds that don't pay regular tax on contributions or earnings. There are specific tax rules that apply if you're a member of an untaxed fund. If you’re not sure, check with the fund and they’ll be able to advise you.

If you have reached Age Pension age or claim a government allowance, you might also be eligible for the seniors and pensioners tax offset (SAPTO) which allows you to earn more income but pay less tax. In some cases, SAPTO may reduce your tax liability to zero.  

In order to qualify for SAPTO you must be eligible for an Australian Government pension or allowance (even if you don’t currently claim it) and your assessable income for SAPTO purposes (known as rebate income – see below) must meet certain limits. 

For instance, if you are single, the maximum tax offset you are eligible to receive is $2,230. This goes down 12.5 cents for every dollar your rebate income is over the $32,279 shading-out threshold until it cuts out completely at $50,119. 

Members of a couple can receive SAPTO where their own rebate income is below the threshold, and 50% of the couple’s combined income is less than the threshold level. If you have an unused part of an offset, you may be allowed to transfer it to your partner. 

This table lists the offset amounts for singles, couples, and couples separated by illness – including the income limits. 

Your rebate income is used to decide if you are eligible for the SAPTO. It is calculated using your taxable income adjusted to include other amounts such as investment losses.

For more information on how to calculate your rebate income, see the ATO website.

If your only source of income is the Aged Pension and no tax has been withheld from it, you don’t need to lodge a tax return. If you have other sources of income, you may need to lodge a tax return and declare how much pension you’ve received. Depending on how much you’ve earned, you may need to pay tax.