Noel Whittaker's strategies for a tax-free retirement

Expert advice on how to make your funds go further

How to have a tax-free retirement

Your account-based pension is taxable if you are under 60 but it gets better treatment than ordinary income. Part of it may be tax free, if some of the money in the fund is derived from non-concessional super contributions and the balance receives a 15 per cent tax rebate.

Let’s imagine Jane, aged 58 has $500,000 in her account-based pension fund, which includes $250,000 non-tax­able component due to non-concessional contributions.

Jane draws an initial pension of $40,000 a year (eight per cent of the balance of her fund). Because the taxable portion is 50 per cent of the balance, 50 per cent of the pension ($20,000) will be tax free. The balance of $20,000 a year will be taxable, less a 15 per cent rebate, which is equal to $3000.

If Jane had no other income, the rebate would wipe out all her tax and she would have the best of both worlds. The money would be held in a tax-free environment and she would enjoy a tax-free income from it. Note that if the fund earned better than eight per cent for the year, Jane would finish the year with more than she started with in her account-based pension fund account, and enjoy a tax-free pension.

Of course, once you reach 60, all withdrawals from super­annuation are tax free. If you convert the fund to an account-based pension fund it will be a tax-free fund, but you will be required to make at least the minimum withdrawals from it; leave it as super and your fund will continue to pay the normal 15 per cent income tax, but there will be no requirements to withdraw any money from it.

This article is an extract from Superannuation Made Simple, Noel Whittaker’s guide to all things superannuation.

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    COMMENTS

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    *Imagine*
    19th Dec 2017
    10:27am
    In South Australia, public servants such as police, teachers etc who paid into the defined benefit scheme (now withdrawn) pay tax because of the way that the SA Govt. set the super scheme up. Unlike their counterparts in Victoria and NSW a retiree on $50 000 pension will pay approximately $6000 in tax and medicare levy. And, the way SAPTO is constructed the married person will pay more tax than the single person. The AUS retirement income system, if it can be called a system, is a mish-mash of stupid rules and needs a total overhaul, the sooner the better.

    19th Dec 2017
    1:13pm
    And ensure income from your non super sources are within the tax free threshold
    Shares are good as most dividends are already franked at30% so this may even get you a nice refund at year end
    Old Geezer
    19th Dec 2017
    2:37pm
    I often wonder how long can this last? Meanwhile why not take advantage of it?
    *Imagine*
    19th Dec 2017
    2:41pm
    Unfortunately that again does not work for the SA State superannuant mentioned above because the tax free threshold has already been reached in the super pension so any extra income is taxed at the ordinary marginal rate, in my case 32.5%. As I said the system is too complicated and needs to be changed.
    Anonymous
    19th Dec 2017
    10:53pm
    Well if youre earning taxable income @ marginal rate of 32.5% on top of tax free income of $52 k, I dont think you should be complaining mate

    Thats over $100k after tax income in your hands
    *Imagine*
    20th Dec 2017
    9:31am
    You are not listening Raphael. Read the first post. The SA superannuant is taxed as a normal wage earner albeit with a senior discount. You should also read the SAPTO rules and you will find that the tax free threshold is half of the $52k that you mention if the income is from one member of a couple.

    That is if each earn under 26k then there is no tax (not so for SA superannuant though) then each member is tested for half the threshold and if they earn more than 26k then they are taxed.

    The stupid rules that need to be changed. I imagine most people do not understand them because they are too complex. That is why you jumped to conclusions about my income prior to understanding the reasons why a married 72yr old on a state pension of $52k pays $6k in tax.
    Sundays
    20th Dec 2017
    7:58pm
    I completely agree with you Imagine. However, you do realise that unless you have a lot of assets you are assessed under the income rules by Centrelink and can receive a part pension, health care card etc. The way your defined benefit scheme is structured, some of it will be treated as exempt income for Centrelink purposes as well
    *Imagine*
    21st Dec 2017
    8:47pm
    Thanks for response Sundays. Yes 4% of my SA Pension is seen as return of capital, therefore not counted for taxation or Centrelink purposes and we do receive a tiny part pension, nearly enough to pay the ATO bill. However, Centrelink look at combined gross income, as my wife and I worked for many years in England we receive a part UK pension that ATO allow 8% as undeducted contributions (non taxable), yet Centrelink consider the gross UK amount as income, which they do not do for AUS pensions. You may be interested to learn that the ATO tax 92% of my UK pension at 32.5% + medicare levy and Centrelink count the gross amount as income, so reduce my part pension by 50c in the dollar. The result is that the AUS Govt are receiving 81.74% of my UK income and I get the remainder. I am doing fine but would do even better if the 'system' was not so screwed. It is far too complicated and becomes more complex as knee jerk patches are put in to repair anomalies, for example the new 'non-income tested CSHC' for those who lost their pension under new asset test limits. We really do need a complete review ASAP.
    Sundays
    22nd Dec 2017
    8:52pm
    Yes, Imagine a complicated system in need of urgent overhaul. Centrelink changes seem to be made independently of the ATO and vice versa. Commonwealth Defined Benefit pensioners saw their return of capital arbitrarily reduced to 10% rather than the actual amount of their own contributions which reduced Centrelink pension, yet similar pensions paid to retirees on defence service pensions were exempted from these rules. People starting an allocated pension from 1 January 2015 found their super treated as an asset by Centrelink but those already receiving allocated pensions were grandfathered. You can buy an investment property and the value of the property is reduced by the loan for Centrelink purposes but buy a car and any car loan does not reduce the value of the asset.

    The list goes on, and these endless changes disadvantages some, but not others.