Tax is often the last thing on our minds when we're planning for retirement. But it's important to understand how your retirement income will be taxed, so you can make the most of your savings.
The good news is that super is a tax-effective way of building wealth for your retirement, and the tax benefits become even more pronounced when you retire.
The tax treatment of payments from superannuation depends on factors such as your age and circumstances at the time they are received.
On or after age 60
No tax is payable on either lump sum payments or account-based pension payments received on or after age 60.
By converting your super account to an account-based pension account, investment earnings – including realised net capital gains – are generally tax-free within your pension account.
After reaching your preservation age, but before age 60
If you have reached your preservation age but are not yet 60, the tax treatment depends on the type of payment (either income or lump sum) and the components of the payment (either tax-free or taxable).
The tax-free component includes personal contributions you made from your after-tax income unless you claimed a tax deduction for them. The taxable component of your super is the total value of your account less the tax-free component.
The tax treatment of payments made from super after reaching your preservation age but before age 60 are:
| Income payments from your account-based pension | |
| Tax-free component | Tax-free |
| Taxable component | Taxable at your marginal tax rate (plus Medicare levy), less 15% pension offset |
| Tax on lump sum payments | |
| Tax-free component | Tax-free |
| Taxable component | 2023/2024 financial year: First $235,000 is tax-free and the balance is taxed at 15% (plus Medicare levy) |
Generally, your super benefit will include both a tax-free and a taxable component. When you make a withdrawal, your provider calculates the components of the withdrawal based on the proportion of components that make up the total value of your account.
The amount of each component is calculated at the following times:
- Each lump sum payment from a super account – just before it is paid
- Income payments from a pension account – when the income stream started
- Lump-sum payments from a pension account – when the income stream started
- An income stream commuted back into your super – before a new benefit is paid
You can't choose to withdraw only from the tax-free component of your account.
The low rate cap amount (currently $235,000) is a lifetime cap which is reduced by any amount previously applied to the low rate threshold.
Before reaching your preservation age
There are limited circumstances in which you can access your super before your preservation age including financial hardship and compassionate grounds.
The tax treatment of payments made from super before reaching your preservation age are:
| Income payments from your account-based pension | |
| Tax-free component | Tax-free |
| Taxable component | Taxable at your marginal tax rate (plus Medicare levy) |
| Tax on lump sum payments | |
| Tax-free component | Tax-free |
| Taxable component | Taxed at 20% (plus Medicare levy) |
Tax on disability super benefit
A tax offset of 15% is generally available on disability super benefits paid as a pension to members under age 60.
Tax on terminal illness benefits
Generally no tax is payable on benefits that are paid to you under the ‘terminal medical condition’ condition of release.
Further information
For further information please speak to your financial adviser or call us on 1800 022 033 during business hours (Sydney time).
However, as a general starting point, you can use the Money Smart calculator to work out:
- How long your account-based pension will last
- How investment returns will affect your pension balance
Read more retirement articles here.