A tax roadmap for your final working years: Maximising caps, timing

• Get your total super balance (TSB) from the most recent 30 June and the record of your unused contribution cap space from the last five years (if any). You’ll find this by logging in to myGov and checking the superannuation section.

• Record your assets outside super and their value. If you would consider selling any of your investments to move more into super or for another reason, calculate the taxable capital gain the sale(s) would generate. If you’ll be selling on or after 1 July 2027, you will need to know how much of the taxable gain is related to the period before that date versus afterwards. You may need your accountant’s help.
• Set your intended retirement date and decide if it is flexible.
• Note any expected future events that should be built into your plan such as inheritance, moving house or downsizing and changing work hours.

You’ve started planning for retirement. But how far along are you?

You may know your super balance, have a rough retirement date or be thinking about the Age Pension.

Take our free 2-minute quiz to find your planning stage and see what to focus on next.

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Use your concessional cap space

Concessional contributions include salary sacrifice, personal contributions you claim as a tax deduction and your employer’s contributions. They are taxed at the concessional rate of 15% instead of the marginal rates that apply to your income. Because of the low tax rate, most people can reduce tax by making concessional contributions, leaving more money to be invested for retirement.

The concessional contribution cap limits the amount you can contribute to super each year at the concessional tax rate.

If your total super balance (TSB) was below $500,000 on 30 June immediately before the start of the financial year and you have unused cap space from any of the prior five years, you can contribute more than the usual annual limit. This option is called ‘carry forward’. When you don’t consume your unused cap space within the five years after it accumulated, it expires and the opportunity is lost.

The lead up to retirement means you’re likely to have enough income or savings to maximise your tax-effective contribution and the trade-off of losing access to your money until you can access super is less important. You’ll have access to your super savings soon, or perhaps already do.

The annual cap, expiry of unused cap space, age limits and TSB limit for access to carry forward mean your concessional cap is a ‘use it or lose it’ opportunity. The sequence of your plan is critical.

Making non-concessional contributions that increase your balance above $500,000 could prevent you from using your remaining carry-forward cap space in future years. Unused cap space also expires if you don’t use it within five years. And if you’re not eligible for carry-forward contributions, the opportunity to use your annual cap disappears every year.

You can’t make concessional contributions after you turn 75, and when you’re 67–74 you need to meet the work test to claim a tax deduction for your personal contributions.

If you’re planning to claim a tax deduction, you must submit a notification to your super fund indicating the amount you will claim before you start a pension with any part of your balance. The notice should also be provided before taking a lump sum or rolling over to another super fund, although a partial deduction is still available if you rolled over or cashed only part of your balance.

When your total income plus concessional contributions is above $250,000 there is additional tax to pay on at least part of your concessional super contributions (Division 293). The additional tax reduces the benefit available but usually doesn’t eliminate it completely.

Consider the timing of capital gains

Investing the proceeds in super can reduce tax because retirement phase pensions and annuities come with tax-free investment earnings, though the transfer balance cap limits how much can be transferred into this tax-free phase.

Getting the timing right matters just as much as where the money ends up. Tax on gains may be reduced by making concessional super contributions if you have space available under your cap or by putting off the sale until after retirement when you will have low income and a low marginal tax rate. The less tax you pay on the gain, the more you keep for retirement.

Remember the portion of any taxable capital gain that accrues after 30 June 2027 comes with a minimum 30% tax rate, even if your marginal rate is lower. The portion that accumulated before the changeover has no minimum tax applied.

Move other savings into super after tax

When further concessional contributions are not possible under your cap or won’t reduce tax, it’s time to think about non-concessional (after-tax) contributions.

Moving savings into super after tax won’t reduce your tax bill that year, but it does get your money into the low-tax super environment where future investment income and capital gains will be taxed at 15% in the accumulation phase and 0% in the retirement phase. These rates could be lower than what you would pay if you kept the investment outside super in your retirement.

The non-concessional contribution cap is four times the concessional cap, so large contributions are possible, but planning your timeline is still important.

The bring forward rule can allow you to contribute up to three times the annual cap in one year, but access to it is restricted by your total super balance (TSB) and no further non-concessional contributions (except downsizer amounts) can be added to super after you turn 75.

When your 30 June TSB is close to the transfer balance cap, your bring-forward window shrinks. You may only be able to access a two-year bring-forward arrangement, or in some cases just the standard annual non-concessional cap with no bring-forward at all.

Your non-concessional cap is zero in the following year when your total super balance was above the transfer balance cap on 30 June.

A well-planned timeline can help you add the amounts you want to before your age or balance gets in the way.

Keep in mind that contributions can’t be added to a pension or annuity directly. You can make all your contributions before starting a pension or add contributions to a separate accumulation account if you have already started an income stream.

Starting a pension

A transition to retirement (TTR) pension can be used strategically in the years before you stop work.

Available when you’re aged at least 60 and have not yet turned 65, a TTR pension allows you to withdraw up to 10% of its balance per year as tax-free income. To start one, you transfer some of your existing superannuation balance into a TTR pension product with your chosen super fund.

The income from a TTR pension can be used to increase the amount you can afford to add to super by making concessional contributions. By following this strategy, you could add more to super than you are withdrawing while keeping the same after-tax income you had before, because of the low tax on concessional contributions.

Alternatively, the extra income could make it affordable for you to reduce your working hours. The two uses of a TTR pension (i.e. to increase concessional contributions and to reduce working hours) can also be combined into one strategy.

Because a TTR pension is not in the retirement phase of the super system, investment earnings in these accounts remain taxable at the 15% rate, like other savings in the accumulation phase.

When you turn 65 or change jobs after your 60^th birthday, you can instead use a retirement phase pension for the same purposes. Pensions in the retirement phase have no maximum annual withdrawal and generate tax-free investment earnings. Starting a retirement phase pension as soon as you’re eligible is often the more tax-effective option, though Centrelink considerations and the transfer balance cap could be reasons to delay.

If you’re aged 60 or over and permanently retired, or any age and permanently incapacitated, you also have the option to open a retirement phase pension.

Recontribution strategy

Withdrawing a lump sum from your super and using it to make a super contribution is known as a recontribution strategy. The recontribution can be added to your or your spouse’s account, depending on your goals.

To be eligible to withdraw a lump sum, you need to meet a condition of release with no cashing restrictions. For most people, this will be turning 65, leaving a job after age 60, or being aged 60 or over and permanently retired from the workforce.

A recontribution strategy becomes available before you retire if you work beyond age 65 or if you change jobs after turning 60.

There are four potential uses for a recontribution strategy:

1. Convert taxable components of your super to tax-free component to reduce tax to non-dependent beneficiaries (often adult children) when they inherit your remaining super balance.
2. Move savings from the account of a person with a balance above the transfer balance cap to the account of their spouse with a lower balance, so both partners can use their entire balance to start retirement phase income streams.
3. Move savings to the account of the lower-balance spouse to keep both accounts below the threshold where Division 296 tax applies to investment earnings (currently $3 million).
4. Move savings into the younger spouse’s account to improve the older spouse’s Age Pension.

Here, the timing and sequence of your plan are important again. A high balance on 30 June restricts your ability to make non-concessional contributions in the following year. The age limit of 75 for voluntary contributions also applies. And any other non-concessional contributions you want to make must be accommodated under the cap alongside your planned recontributions.

When the goal of a recontribution strategy is to reduce future tax for beneficiaries, consideration should be given to adding the recontribution to an empty accumulation account, to keep the new tax-free component generated by the contribution separate from taxable components. The account can then be used to start a pension to preserve its status as a 100% tax-free component.

Watch for extra tax when your balance is high

Superannuation is a tax-efficient structure to hold retirement savings because of its tax-friendly treatment, but it may not always be the lowest-tax environment if you have a large balance.

The transfer balance cap limits the amount you can invest in the tax-free retirement phase and Division 296 tax applies to a portion of your investment earnings when your balance is above the large super balance threshold (currently $3 million).

When you’re affected by these limits, accumulating additional savings in super may result in higher taxes than investing outside the system, depending on your overall tax position.

Quick guide