Retirement income & tax

MoneySmart
(ASIC)

Tax and retirement income streams

The amount of tax you will pay on your retirement income stream depends on the type of income stream, when you started it and what it was purchased with.

Here we explain how different retirement income streams are taxed and why it depends on whether they were bought with superannuation money.

• How super income streams are taxed
• How transition to retirement income streams are taxed
• How income streams from defined benefit super funds are taxed
• Different tax rules for non-super income streams and annuities

How super income streams are taxed

Super income streams are also known as pensions and annuities. They can be account-based pensions with no set time period or annuities that are fixed for a specific period of time.

Superannuation benefits are made up of two components, taxable and tax-free.

The taxable component is made up of:

• Employer contributions
• Salary sacrificed contributions
• Personal contributions where a tax deduction was claimed

The tax-free component is made up of:

• After tax contributions
• Government co-contributions

For people aged 60 and over

Benefits from a taxed super fund (i.e. most super funds) are tax-free.

For people aged 55 to 59

No tax is payable on the tax-free component of your income payment. The taxable component of your income payment will be added to your taxable income. It will be taxed at your marginal tax rate, less a tax offset equal to 15% of the taxable portion of the payment.

Work out your marginal tax rate.

Benefits paid to people aged under 55

It is rare for people under age 55 to be able to access their super. Usually your super can only be accessed if you become permanently disabled. In this case, you will be taxed as if you are aged 55-59.

If you are accessing your super for reasons such as hardship, the rules are slightly different. The tax-free component of your income payment will be tax free. The taxable component of your income payment will be added to your taxable income and taxed at your marginal tax rate.

Members of government super funds

Some government super funds don't pay regular tax, and are known as 'untaxed funds'. If you are a member of an untaxed fund, you may be taxed when you take out your benefit. Ask your super fund for details.

How transition to retirement income streams are taxed

A transition to retirement income stream is a pension bought with super money while you are still working. You must have reached your preservation age.

Find out your preservation age.

You are restricted to withdrawing a maximum of 10% of the balance each financial year and you are not allowed to withdraw lump sums.

These restrictions do not affect the tax treatment of the money you take out. The tax is the same as ordinary retirement income streams purchased with super money, based on your age.

Tax on transition to retirement pensions

Investment returns on TTR pensions are taxed at up to 15%, just as they are in a super accumulation account. More information about changes to super contribution limits, tax concessions and the amount that can be held in a retirement phase account can be found on the Australian Tax Office (ATO) website.

How income streams from defined benefit super funds are taxed

Defined benefit income streams usually come from an employer super fund or a government employee super scheme.

Calculating the tax-free portion of a defined benefit income stream is very complex. However, before you are eligible for your benefit, your fund will send you a statement which will set out exactly how much is taxable and how much is tax free.

Different tax rules for non-super income streams and annuities

An annuity is an income stream purchased with money outside the super system. It will pay you a fixed income for a defined period of time, regardless of how the markets are performing.

Income from annuities, less a deductible amount, will be taxed at your marginal tax rate. The deductible amount represents the amount of your original capital that is being returned to you with each pension payment.

Tax on retirement income streams can be a complex area and we recommend you seek help from a tax professional or financial adviser. For most people, income streams bought with super money will be tax free from age 60.