Retirement brings more than just a change in lifestyle—it also changes how you are taxed.
Contrary to popular belief, retirement doesn’t necessarily mean the end of taxes. That’s why it’s important to understand how taxes are applied in order to optimise your tax position to make your retirement savings last longer.
This article covers the main types of taxes you’ll face in retirement, including the relevant tax rates and possible ways to reduce it.
If you’d prefer to watch than read, this video also covers the topic:
Do Retirees Pay Tax In Retirement?
Yes, retirees in Australia are still subject to tax. In fact, most of the taxes in retirement are similar to those paid before retirement. However, when you retire you have more opportunities to reduce or even eliminate certain taxes during retirement.
Let’s have a look at the 7 types of taxes in retirement.
The 7 Types of Taxes in Retirement
The 7 main types of taxes in retirement include:
- Tax on Superannuation Earnings
- Tax on Superannuation Pension Income
- Tax on Centrelink Age Pension Income
- Tax on Work-Related Income
- Tax on Personal Investment Income
- Tax on Personal Capital Gains
- Tax on Super Contributions
Let’s explore each type of tax individually so that you can gain a complete understanding of each one.
1. Tax on Superannuation Earnings
In retirement, your superannuation can be held across three types of accounts. The choice of account depends on factors such as financial situation, age, strategy, and personal circumstances. These accounts include:
- Super Accumulation account – This is a regular super account that you have while you are working that either you and/or your employer contribute to.
- Transition to Retirement Pension account – This is an income stream that you are eligible to start once you have attained age 60, even if you are still working. It’s designed to allow partial access to your super as you wind down into retirement.
- Account-Based Pension – This is an income stream you can start once you are fully retired and provides regular payments to cover your retirement expenses. There is no limit on the amount you can withdraw each year.
In each account, your superannuation balance will be invested, presumably earning an income, as well as potential capital gains. The taxation on these earnings will differ depending on the type of account: –
- Tax on Income Earnings: All income derived from investments will be taxed at 15% within an accumulation or TTR Pension account and 0% within a pension account.
- Tax on Capital Gains: All realised capital gains will be taxed at 15% (reducing to 10% if owned for longer than 12 months) within an accumulation or TTR Pension account and 0% within a pension account.
Just a note: many people mistakenly believe that all pension earnings from super are tax-free from age 60. However, as explained above, it’s the type of account you hold your super in that determines the tax on earnings—not your age.
That covers tax on superannuation earnings, what about tax on superannuation pension Income
2. Tax on Superannuation Pension Income
If you start an account-based pension or a transition to retirement pension, you will receive regular income from your superannuation to cover retirement expenses.
This income received will be completely tax-free.
The only exceptions to this is if you are receiving account-based pension income while under age 60 and/or if your pension income includes an untaxed component. You may have an untaxed component if you have been granted access to your super in the form of an income stream due to a disability or insurance payout.
Another type of superannuation pension that you could be receiving (generally associated with government and semi-government employees) is a defined benefit pension. Defined benefit (DB) pensions from a taxed scheme will usually be tax-free whereas DB pensions from an untaxed scheme will be taxable. Some DB pension income streams will be partially assessed for tax and others will be fully assessed.
3. Tax on Centrelink Age Pension Income
Once you have retired and reached age 67, you may be eligible for Centrelink Age Pension payments. These payments are means-tested, based on your income and asset levels.
If you are eligible, these Age Pension payments are added together with any other types of taxable income and fully assessed for personal income tax purposes at your marginal tax rate (0% to 47%). The actual tax rate payable will depend on how high your other forms of taxable income are in any given financial year.
Another type of income that might be taxed at your marginal tax rate is any work-related income.
4. Tax on Work-Related Income
Despite being retired, you might choose to indulge in some casual or part-time work for a little bit of play money, some socialising, and to keep the grey matter functioning.
If you do decide to work while retired, any income earned will be fully assessed and taxed at your marginal tax rate.
One way of reducing taxes on personal income such as this is by making personal deductible contributions to super, which provides you with a personal tax deduction equal to the contribution amount. Just be mindful of the rules and limits around how much you can contribute.
In addition to the Age Pension and work-related income, the other type of income that is assessed for tax in retirement is personal investment income.
5. Tax on Personal Investment Income
You may own shares, managed funds, or an investment property that is providing you with income in the form of dividends, distributions and rent. Even bank accounts and term deposits pay interest which is assessable. This investment income is added together with all of your other sources of taxable income and then taxed at your marginal tax rate.
The tax rate on investment income can range from 0% to 47%, depending on the level of your personal assessable income for the year.
Depending on your age and contribution limits, this taxable income may be able to be reduced through personal deductible super contributions and other deductions.
Another type of tax you may pay in retirement is capital gains tax, which applies to any personally-owned investments.
6. Tax on Personal Capital Gains
Capital gains tax may be payable when an investment owned in your personal name was sold by you and the sale price was greater than the original purchase price.
When this occurs, the profit you make will be assessed for capital gains tax (CGT). However, if the investment you sold was owned for longer than 12 months, then only half of the profit will be assessed for tax due to the 50% general capital gains discount.
In Australia, CGT is only payable if the investment you own is sold. You do not need to pay CGT on the increase in an investment value until you sell the investment.
The tax rate on capital gains will depend on your marginal tax rate because the assessable capital gain is added together with your investment income, work income and any other taxable income.
As mentioned, your personal taxable income can be reduced by making deductible contributions to super, but you will need to be mindful of contributions tax to ensure the deductible contribution will be financially beneficial.
Related article: Should I Sell Investment Property Before Retirement
7. Tax on Super Contributions
Any contributions you make to super will fall into one of two main categories: concessional contributions and non-concessional contributions – which are taxed differently.
Non-concessional contributions, including personal contributions, downsizer contributions, spouse contributions, and small business retirement exemption contributions, will not incur any contributions tax. The full amount of each contribution will be added to your super balance.
Concessional contributions—such as employer contributions, salary sacrifice, and personal deductible contributions—are taxed at 15% when added to your superannuation. For very high-income earners, an additional 15% tax, known as Division 293 tax, may also apply.
After taxes, the remaining amount is added to your super balance.
Unfortunately, there is no way to reduce or eliminate contributions tax.
So, that covers the 7 types of taxes you may encounter in retirement, each affecting retirees differently based on things like income sources, assets, and superannuation contributions.
So how can you reduce taxes in retirement?
How To Reduce Taxes in Retirement
There are several ways to reduce tax in retirement, including making deductible super contributions, using any carry-forward unused amounts, receiving tax-effective income like fully-franked dividends, maximising available tax deductions, or increasing contributions to super to start an income stream that can be tax-free.
However, optimising your tax position and the ability to use certain strategies will depend on your unique situation…
This is where we can help.
At Toro Wealth, we specialise solely in retirement planning advice. We aim to give you confidence about when you can retire, the retirement income you can achieve and how to optimise your financial position and tax in the lead-up to retirement. If you’re interested in learning more about our service and cost, click here.
