Retiring before the age of 60: the tax deal

If you retire before the age of 60, your super benefits are likely to be subject to tax — but not always. With the right structure, and usually with expert advice, many Australians retiring early can end up paying no tax.

If you’re willing to wait until you turn 60 before you retire, you can automatically receive your super benefits tax-free.

Super benefits can be made up of two components — ‘tax-free’ and ‘taxable’. When you retire before the age of 60, the tax-free component is, as you’d expect, tax-free, while the taxable component is usually subject to tax. How much tax you pay on your super benefit when you cash your super before the age of 60 depends on:

• The size of your super benefit. The first $165,000 (for the 2011/2012 year) of your taxable component is tax-free when taken as a lump sum, except for certain benefits paid to some public servants. The tax-free limit of $165,000 is known as the low-rate cap.
• Whether your benefit includes a tax-free component, which you receive tax-free. The tax-free component represents your non-concessional (after-tax) contributions and, if you were a member of a fund before July 2007, several other elements of your super benefit. The tax-free component is always tax-free.
• Whether you take an income stream. A superannuation lump sum is taxed differently from a benefit that you convert into a superannuation income stream (a series of regular payments over a period of time). If you retire before the age of 60, you may receive a tax-free amount as part of your income stream, and also be eligible for a 15 per cent pension offset on the taxable component of your benefit. The pension offset reduces your tax bill, potentially to zero.
• Whether you receive a benefit from a taxed source or an untaxed source. You pay more tax when you receive a benefit from an untaxed source — about 10 per cent of all superannuation accounts are from an untaxed source, and relate to benefits from older public sector super schemes (now closed to new members).

Note: Do your research and get advice on your retirement options. You can discover a lot of helpful information by attending one of the many free retirement seminars held around the country. Your super fund may hold such seminars, and some financial planners looking for new business may advertise free seminars in the newspapers. An excellent resource is the Financial Information Service (FIS). FIS is a not-for-profit and independent financial education and information service (although funded by the Government) that is available to anyone.

Source: Extract from Trish Power’s book Superannuation: Planning Your Retirement For Dummies (Wiley) ($29.95). Reproduced with permission.

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