Superannuation retirement income streams are a primary source of financial support for many retirees. To encourage retirement savings, the Australian Government provides concessional tax treatment on both earnings within super and income payments from retirement phase pensions.
This guide covers how different types of superannuation income streams are taxed, including the impact of age, tax componentry, and defined benefit income caps.
Tax on Earnings Within Retirement Phase Income Streams
- APRA Funds – Earnings on assets supporting a retirement phase income stream are tax-free.
- SMSFs – Funds may be eligible for Exempt Current Pension Income (ECPI), allowing a portion of earnings to be tax-exempt.
Understanding Tax Components in Income Streams
When a pension starts, the tax components are fixed and all income payments must be made in the same proportions as at commencement. Unlike accumulation phase super, earnings within a pension account do not increase the taxable component.
Taxation of Superannuation Income Payments
The taxation of superannuation income streams depends on:
- The recipient’s age – Tax rates change once a person turns 60.
- The tax components – Income payments include both tax-free and taxable components.
- Whether it’s a standard or defined benefit pension – Defined benefit pensions have specific caps.
Taxation of Income Payments Based on Age
- Under preservation age – Taxable income is taxed at marginal rates, with offsets in certain cases.
- Preservation age to 59 – Taxable component is taxed at marginal rates but receives a 15% tax offset.
- Age 60 or over – Income payments from a taxed fund are tax-free.
Lump Sum Withdrawals from Retirement Income Streams
Lump sum commutations from retirement phase pensions are tax-free for individuals aged 60 or over. For those under 60, taxation depends on the tax components and whether the low-rate cap applies.
Capped Defined Benefit Income Streams (CDBIS)
Defined benefit pensions are subject to a defined benefit income cap. In 2023/24, the cap is $118,750 per year.
- Exceeding the Cap: If CDBIS payments exceed the cap, excess amounts may be taxed at marginal rates or have tax offsets reduced.
Final Thoughts
Understanding the taxation of superannuation income streams is essential for effective retirement planning. Ensuring that income payments are structured tax-effectively can maximise retirement savings and reduce tax burdens. Seeking professional advice is recommended to tailor strategies to individual circumstances.