how retirement income is taxed

The last day of October is the final date when individuals can file their tax returns unless they are represented by a tax agent. Many retirees – those on a Full Age Pension or those whose sole source of income is from their super – won’t be required to file a return. But for the many others who receive income in addition to the Age Pension or super, some tax may need to be paid. 

With this year’s deadlines passed, many retirees will have received their tax returns and now be able to review this very useful summary of their finances.

This is a really helpful thing to do. 

Firstly, because it puts you in immediate touch with how much money you have earned, and how much tax you have paid. Which then allows you to think and plan ahead for financial year 2023-2024 and make adjustments if you’re paying tax unnecessarily.

Three ways your retirement savings are taxed

Although tax rules can seem very complex, particularly when you get into the finer detail of ‘grandfathering’ and concessional superannuation contributions etc, there are three broad ways your retirement savings will be taxed. Here’s a quick overview.

But first a spoiler alert!

The following overview is just that – a top level explainer of the three different levels of tax for those with retirement savings. They are not offered as advice, but information which will help you understand your own ‘buckets’ of savings. Tax is not the only consideration that matters, so this article may be a timely prompt for you to seek further advice from a financial professional, perhaps your accountant or an adviser, who can guide you in the best way to suit your own particular circumstances. Another important cautionary note is that the Transition to Retirement strategies have some different rules which are not covered below.  Again it is important to seek specific guidance on such strategies when considering tax implications.

Retirement savings- Accumulation accounts

These are superannuation accounts in savings mode. They are usually pertinent to those yet to retire, or those who have retired, but have not converted their super savings into an income stream. Generally speaking,Australians under age 60, will have their super in an accumulation account.  Age 60 is iswhen you could have the opportunity to access your super.  This is also called Preservation Age. Some retirees will choose not to withdraw, instead to keep their savings in accumulation for years after they have reduced hours or left full-time work. This is worth considering, as those who have accumulation accounts will pay 15% tax on earnings in their accounts.

Account Based Pensions

Not to be confused with the government payment of the Age Pension, superannuation pension accounts are those which have been ‘rolled over’ into Account-Based Pensions from which regular income streams are paid. Lump sums may also be accessed from such accounts. Because these super funds are now in ‘decumulation’ mode (i.e. the spending phase of retirement) there is no income tax paid on such funds. The difference between the 15% paid when saving super and the 0% tax paid when withdrawing is significant. And so it is worth considering whether you are paying too much tax if your fund is still in the accumulation phase. We covered this topic recently with an example of how Anne and Michael were able to save $5760 by moving their super. It’s well worthwhile being aware of the tax distinction between saving and spending phases of super.

Money held outside super

This category essentially refers to private savings and investments as well as monies withdrawn from super and placed in different investment accounts, perhaps cash accounts. It’s not unusual for retirees to consider money in super as ‘locked up’ and money in cash as more available. In reality, your super savings (provided you meet the conditions of release) are as readily available as cash deposits, give or take a day or two. But perceptions can be powerful. This is one of the reasons that some retirees will choose to move lump sums into bank accounts as soon as they are able. But alongside other earnings outside super – rent, dividends, employment income, to name a few – this income will be taxed at your marginal tax rate. Such rates vary, but here are the current tax rates for Australian residents.

Tax obviously depends entirely upon your overall earnings – if you earn less that $18,200 then you pay 0% and progressively more for higher incomes. The main point to consider is, if you are paying tax at a marginal rate which is higher than 15%, then is there another way of organising your retirement savings that can reduce this tax impost?

As we noted above, this comparison of tax rates on retirement savings is designed to give you some extra knowledge to help you to  raise the right questions about your own situation, with the right advice professional.

And tax return time is entirely the right time to do so.

If you would like to further explore the tax implications on your own retirement savings, an Understanding more about super consultation will assist you to assess the options available to maximise your super earnings.

What about you?

Do you find discussions about tax difficult? 
Do you feel there might be a simple way to tax retirement savings?