Transitioning into retirement brings a wave of new experiences, but with it comes a handful of financial concerns that need careful review, too.
Let’s draw our focus on taxation.
Throughout our working life, we lose a hefty chunk of our pay to ongoing taxes, and many will likely believe that all ends once we reach retirement age. Unfortunately, this isn’t always the case.
Unravelling matters like how taxes in retirement work, whether a specific stream of retirement income is taxed, and what the tax implications are if you decide to return to work after retirement can be complex. In this comprehensive guide, Aspire2Welath Financial Adviser Mitchell Mackenzie navigates the seas of Australian taxation as it applies to your retirement and offers practical advice that will help to maximise your financial benefits.
Is Retirement Income Taxed in Australia?
Taxes in retirement can differ depending on your age and the type of income you’re receiving.
The good news is that for most people over 60 receiving a pension from a super fund, you likely won’t have to concern yourself with any form of retirement tax.
The most common ways to access your superannuation are to take out a lump sum or initiate an income stream like an account-based pension (or even a combination of the two).
Your choice will influence your tax liabilities.
For example, investment earnings on the assets in your pension account, account-based pensions as income streams or lump sum withdrawals received after turning 60 are tax-free.
Suppose you decide to reinvest your pension payments or withdrawals in other assets, like shares or property, and generate income. This income would become part of your assessable income and might be subject to tax, depending on your total earnings and any applicable tax deductions.
To get a better understanding of retirement tax criteria, it helps to break down the stipulations by age and income stream:
Retirement and taxes if you’re under 60
If you are under 60 years of age, the income you receive from your superannuation can be subject to tax. Your superannuation fund typically deducts the tax from your income stream payments and sends it to the Australian Taxation Office (ATO). While there is a 15% tax offset you can apply to this taxable income, it’s important to be aware that your financial situation may vary.
If you are personally contributing to a super fund at this age, you can receive additional tax benefits by making extra contributions after tax or through personal deductible contributions or salary sacrifice arrangements.
Speak with a financial advisor to determine the right arrangement for your financial situation.
Retirement and taxes if you are 60 or older
As discussed above, for those aged 60 or over, your super income stream payments are tax-free if you receive them from a taxed source. Tax may apply if you have an untaxed source, such as for certain public sector funds. The tax-free status of your super makes this an attractive option for many retirees.
Taxation on Capped Defined Benefit Income Streams
For those who are beneficiaries of either a capped defined benefit income or a specific type of defined benefit pension, there’s a tax-free threshold of up to $118,750.
Should your pension disbursements surpass this limit (the defined benefit income cap), half of the excess amount will be considered part of your assessable income, potentially incurring tax liabilities.
Taxation on Self-Managed Super Funds (SMSFs)
Individuals over 60 years old receiving a pension benefit from an SMSF, whether as a lump sum or an income stream, generally are not taxed. If the benefit is derived from a capped defined benefit income stream provided by the fund, the defined benefit income cap is applicable, and tax may be due.
Taxation for Untaxed Super Funds
Certain government superannuation funds, or constitutionally protected funds (CPFs), are considered untaxed funds. These funds do not pay standard taxes on contributions or earnings. There are unique tax regulations for members of these untaxed funds. If you’re unsure about your fund’s status, it’s advisable to consult with the fund for accurate guidance.
Minimising Taxes with a Transition to Retirement (TTR) Strategy
Say you’re near the end of your career, but not quite ready to put your feet up and enjoy your golden years just yet. A Transition to Retirement (TTR) strategy might be the solution to minimise your tax burden.
A TTR strategy offers flexibility by allowing you to work part-time while drawing income from your superannuation funds or using a portion of your income to build up your super balance in your last years in the workforce. This path allows a gradual segue into retirement rather than a sudden change.
In Australia, A TTR strategy can offer a multitude of tax advantages. If you’re 60 or over, the amount you draw from your superannuation funds is tax-free. For those under 60, while the income is taxable, it’s subject to a 15% tax offset. Not to mention, a TTR Strategy also offers the benefit of leaving more of your money in super, letting it grow over time thanks to the magic of compound interest.
How Can a TTR Strategy Help with Retirement and Taxes?
Transform Your Super into Income
By choosing to work fewer hours or channelling a larger portion of your salary into your super, a consistent income from a Transition to Retirement (TTR) Income account can maintain your current net income.
Benefit from Tax Savings
For those earning over $45,000 annually, it might be advantageous to increase your pre-tax salary sacrifice contributions to your super and balance your income with tax-efficient payments.
Enhance Your Retirement Funds
As you continue to work, your super balance will keep growing through ongoing contributions, significantly impacting your retirement lifestyle.
BOOK YOUR NO-OBLIGATION CONSULTATION TO LEARN MORE
Received Tailored Support with Your Taxes in Retirement
Navigating the path to a comfortable and affluent retirement can often seem daunting due to the myriad available options. This is where the expertise of professional financial advisors and retirement planning services becomes crucial.
At Aspire2, our team of specialists offers customised advice on retirement and taxes. For more information, speak with our specialists today.
This content contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser (Aspire2 Wealth Advisers, 08 9322 7028), and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Please contact us if you want more information.
