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Retiring on your own terms: understanding tax and government benefits

The Australian tax system provides generous tax breaks and benefits for retirees. Here’s what you need to know.

Retirement is often a phase in life when people get ready to start to wind down and do more of the things they enjoy. A round of golf, some gardening, hanging out with the grandkids and a caravan trip—this slower pace sounds like the ideal lifestyle to most of us.

Whatever you choose to do once you stop working, the dream is to retire on your own terms.

It’s why understanding the Australian retirement and tax systems—and how you could benefit from them — is important, because it allows you to maximise your income during the golden years of your life.

Retirement income is usually derived from:

  • part-time or casual employment
  • pensions
  • annuities
  • superannuation
  • investments
  • earnings outside Australia, such as pensions from your country of origin
  • salary packaging

The good news is that in Australia retirees are supported by a generous government benefits and tax system that supports those leaving the workforce.

Benefits: the Age Pension
Australian retirees may be eligible for the Age Pension, which is an income payment from the government, depending on their age, assets and income. Right now, the fortnightly pension rate is $967.50 for singles; if you’re a couple, you receive $729.30 each1. Pension payments are tax-free.

To be eligible for the Age Pension, you need to be 66 and a half years of age or over (increase to 67 from 1 January 2023), an Australian resident at the time of your application and meet the income and asset tests.

Bear in mind that while your family home isn’t counted as an asset, if you decide to sell it could affect your eligibility for the Age Pension.

 

Benefits: concession cards and discounts
Retirees may also be eligible for a number of concession cards, which provide discounts on health care, medicine, transport and utilities.

These include the Commonwealth Seniors Health Card, which provides cheaper health care for retirees who are 66 and a half years of age or over, meet income and residency tests, and don’t qualify for a payment from Centrelink or the Department of Veterans’ Affairs.

The Pensioner Concession Card similarly provides discounted health care and medicine for people who receive certain payments, including the Age Pension, from Centrelink.

In addition, each state and territory has their own free Seniors Card, which provides discounts on public transport and with participating businesses for retirees aged 60 and over.

 

Tax: superannuation tax breaks
You can access your super as early as age 57, but this depends on your preservation age — most people will need to wait until age 60. You can withdraw your super systematically as a regular income or take all or part of your benefit as a lump sum.

Essentially, your nest egg is taxed at three stages. When it hits your super fund (contributions), while it’s sitting in the fund (investment earnings) and when it leaves the fund (super benefits).

Just how much tax you pay at each stage depends on your personal circumstances and the size of your nest egg.

Employer and salary-sacrificed contributions are taxed at 15 percent when they’re received by your super fund. One way to pay less tax, therefore, is to top up your super during your working years with extra contributions.

For most people, an income stream from superannuation will be tax-free from 60. Taxation on lump sum withdrawals depends on a number of factors, including your age and the type of super fund.

It’s worth checking that you’ve provided your super fund with your tax file number, because this extra piece of information is rewarded with lower tax rates.

Tax: Senior Australian Pensioner Tax Offset
The good news is that the Australian tax system is generously geared towards retirees.

An Australian resident of pension age qualifies for the Senior Australian Pensioner Tax Offset, explains Yvonne Chu, Head of Technical Services at Australian Unity.

“Once you retire, you generally can have up to $1.6 million of your super savings in an absolutely tax-free environment, which is as good as it gets,” Yvonne explains.

“There’s quite a generous pensioner tax offset, which essentially means that retirees typically don’t have to pay personal income tax. This means that if someone permanently retires on or after 60, they can convert their super into the retirement phase and draw down on their savings, and this process is entirely tax-free.”

 

Planning ahead to make the most of your retirement income
While the Australian tax system supports retirees, bear in mind that any strategy designed to reduce the tax you pay could be viewed as a tax-avoidance measure by the ATO, so the best advice is to visit an accountant or financial advisor to understand your tax requirements and ensure you haven’t missed anything when preparing for your retirement.

“Preparing for retirement is a marathon, not a sprint,” Yvonne says. “To maximise super contributions, you’ve really got to do it over a number of years, so go and see your financial adviser well before you reach preservation age, so you can look at ways to bolster your retirement income.”

With your accountant or financial advisor, you can then begin to put together a plan to maximise your retirement income and, of course, make the most of your well-earned retirement.

1Rates current as at 11 March 2022. This rate includes the maximum basic rate, energy supplement, and pension supplement.


Important information
This is a publication of Australian Unity Personal Financial Services Limited ABN 26 098 725 145 (AUPFS), AFSL 234459. Its contents are current to the date of publication only, and whilst all care has been taken in its preparation, AUPFS accepts no liability for errors or omissions. This report is general in nature and does not take into account the objectives or circumstances of any particular individual or entity. It cannot be relied upon as a substitute for personal financial, taxation or legal advice.
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