• Tax & account based pensions

  • An account based pension can be a tax-effective way to use your superannuation for your retirement. This is because tax concessions apply to the earnings on your pension account, with earnings on account based pensions tax free and earnings on transition to retirement pensions taxed at a maximum rate of 15%. Also, pension drawdowns after you reach age 60 are normally tax free.

    Depending on your other income, an account based pension may be more effective at minimising the tax you pay each year than an investment outside of super, such as a term deposit.

  • Tax on investment earnings

    • Investment earnings on your account based pension (excluding the transition to retirement pensions) are tax-free. This means that the net returns on an account based pension are generally higher than the earnings on the same investment mix in a superannuation account or a transition to retirement pension account. The only time this will not occur is if investment returns are zero or negative.

      From 1 July 2017 the investment returns on a transition to retirement account are taxed at up to 15%.

  • Tax on pension payments

    • When you start your account based pension, it is divided into taxable and tax-free components. (You will only have a tax-free component if you had a tax-free component in your superannuation account e.g. because you made after-tax contributions.)

      Pension payments—and any lump sum withdrawals—are withdrawn in the same proportion as your tax-free and taxable components.

      There is no tax payable on any tax-free component.

      The treatment of the taxable component of your pension depends on your age:

      • If you are 60 or over, no tax is payable.
      • If you are under 60, the taxable part of each pension payment is taxed at normal income tax rates, plus the Medicare levy.

      You will receive a tax offset of 15% on your taxable component if you are:

      • At or over your preservation age or
      • Totally and permanently disabled (for tax purposes) or
      • A reversionary beneficiary (regardless of your age).

      If you reach your preservation age during a financial year, the offset applies to the amount paid after your birthday. In many (but not all) cases, the offset will reduce the tax on your pension to zero.

  • Tax on lump sum withdrawals

    • There is no tax on the tax-free component of a lump sum withdrawal taken from your account based pension. The treatment of the taxable component depends on your age.

      • If you are aged 60 or more, you will generally pay no tax on any withdrawals.
      • If you are under age 60 (but over your preservation age), the first $200,000 (indexed) of your taxable component is tax-free and the remainder is taxed at a maximum of 15% plus the Medicare levy.
      • If you are below your preservation age, the whole taxable component is taxed at a maximum of 20% plus the Medicare levy.
  • Tax on death benefits

    • There is no tax payable on any tax-free component of your death benefit. However, the treatment of the taxable component will depend on who receives the benefit. It does not matter if the money is paid directly to the recipient or via your will.

      Lump sum death benefits are tax-free if paid to your:

      • Spouse (including a same sex spouse)
      • Former spouse
      • A child under age 18
      • A person with whom you have an interdependency relationship or
      • Financial dependents.

      The taxable component of a lump sum death benefit paid to a non-dependent (for tax purposes), such as a non-dependent adult child, will generally be taxed at a rate of 15% plus the Medicare levy.

      Reversionary pensions will only be taxed if the deceased pension account holder and the nominated reversionary pensioner are both under age 60. A 15% offset will apply to reduce the tax payable.

  • Need more information?

    Call us on 1300 658 776 or contact us if you need more information about the taxation of account based pensions.

  • Bookmark and Share