Tax planning for retirees under 60

For many people it could be tempting to retire before age 60 and call it a career. If that is the case, you should be aware that your superannuation benefit payments will very likely be subject to some tax. However, with careful planning and preparation on your part or with the assistance of an expert adviser, it could be very possible to reduce or even eliminate the need to pay tax on your superannuation benefit payments.

The superannuation tax structure consists of two components: ‘tax-free’ and ‘taxable’.  The tax-free component can be withdrawn from your account without ever paying tax on these benefit payments, regardless of your age, whereas the taxable component will only be tax free if received after the age of 60.

Generally any non-concessional contributions (those made from after-tax income) will form your tax-free component, whereas all earnings from the fund’s performance and any concessional contributions (i.e. Super Guarantee, Salary Sacrifice or Member Contributions) will form part of the taxable component in your superannuation fund.

However, current superannuation law allows for some planning opportunities to better manage and improve your tax position on benefit payments prior to age 60.

Know your preservation age

Before any superannuation benefits can be accessed you first need to know your preservation age. Please refer to the table below to find out your preservation age is and when you might be eligible to access your super benefits.

Date of BirthPreservation Age
Before 1 July 196055
Between 1 July 1960 and 30 June 196156
Between 1 July 1961 and 30 June 196257
Between 1 July 1962 and 30 June 196358
Between 1 July 1963 and 30 June 196459
After 30 June 196460

Lump sum payments

For financial year 2016/2017, if you have reached your preservation age, the first $195,000 lump sum payment (or the first $200,000 for the 2017/2018 year) of your taxable benefit, will be completely tax-free, with some exceptions for certain public sector funds. This tax-free cap of $195,000 (or $200,000) on your lump sum payment is a lifetime limit indexed each year with Average Weekly Ordinary Time Earnings (AWOTE) and often known as the low-rate cap. Any excess lump sums taken above this low-rate cap is, however, subject to tax at 15% plus the 2% Medicare levy.

The tax-free component

The tax-free component represents your after-tax non-concessional contributions and this component can always be withdrawn entirely tax free, even when an individual is aged under 60. Generally speaking, your tax-free component of superannuation is free of tax regardless of when you withdraw your benefits.

Whether you commence a super pension/income stream

Compared to a superannuation lump sum, the benefit received via a superannuation pension is taxed differently. Any income sourced from the taxable component is subject to your marginal income tax rate, with a 15% pension offset (except for certain defined benefits paid to some public servants), if under age 60. But if any part of that pension is made up either partially or fully  from the tax-free component, then that proportion of the pension will be received tax free.

A meeting with a competent adviser could identify planning opportunities surrounding tax-free lump sum withdrawals and re-contributing these benefits back into your superannuation fund. The net effect being that you may be able to increase your tax-free component, which could improve the tax effectiveness of your pension payments.

This can also be a useful strategy for estate planning purposes and death benefit payments.

Benefit from a taxed source or an untaxed source

There are two categories of superannuation funds:

  • Taxed-source superannuation funds, which all taxes are applied by the Commonwealth and;
  • Untaxed source superannuation funds, that did not pay the Commonwealth taxes.

Members of a taxed-source fund (which is the overwhelming majority of super funds) are entitled to pay less taxes on receipt of their super benefits compared to members of an untaxed source fund.This reflects the fact that tax was already paid on these funds through the accumulation phase. Consequently, knowing which type of fund you are a member of is also an important consideration. Most untaxed funds relate to public sector schemes, so if you are a member of such a fund, it is important to understand your funds tax position.

If you are looking to maximise your tax planning opportunities, or you want to speak with someone who can help educate you on what superannuation arrangements and investment strategies might be appropriate for you, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected] to learn more.

The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs. When assessing any investment you should also consider that past performance is not a reliable indicator of future performance

Recent stories

Understanding the Sharemarket: A Beginner’s Guide

Investing in the sharemarket can be a powerful way to grow your wealth over time. Whether you’re new to investing…

Read more

Franked Dividends vs Unfranked Dividends

When it comes to investing in the stock market, understanding the nuances of dividend payments is crucial. One of the…

Read more

UGC Monthly Market Update | May 2024

Join UGC’s Head of Research / Co-Portfolio Manager, Huw Davies, as he takes a deep dive into the latest financial…

Read more

If aged care advice is confusing – get advice

Many people think they can’t afford to get aged care advice, but the reality is you probably can’t afford not…

Read more

Mastering the Tax Game: Boost Your Wealth & Trim Your Tax

As the end of the financial year approaches, it’s the perfect time to refine your tax strategies and maximise your…

Read more