Do Retirees Pay Tax? The Answer May Surprise You

One of the most common questions I receive from Australians approaching retirement is:

“Do I still have to pay tax once I retire?”

The answer is not always straightforward.

Many retirees enjoy tax-free income from their superannuation, while others continue to pay tax on some of their retirement income. The difference often comes down to the type of pension you receive, your age, and where your income comes from.

Let’s look at three common questions that help explain how tax works in retirement.

Question 1: Is Income From My Super Pension Taxable?

Sven recently asked me:

“If I receive $50,000 per year from a superannuation income stream and another $18,000 from bank interest or share dividends, is the investment income added to my pension income for tax purposes?”

This is a great question because many people assume all retirement income is assessed together.

For most retirees receiving an account-based pension after age 60, the pension payments are generally tax-free. Even more importantly, those pension payments are not included as part of your taxable income.

Using Sven’s example:

• $50,000 received from an account-based pension
• $18,000 received from bank interest

The pension income is generally ignored for tax purposes, meaning only the $18,000 of investment income is assessed.

Because that income is below the tax-free threshold, no tax would generally be payable.

What About Australian Shares?

The outcome can become even more favourable when income comes from fully franked Australian shares.

Many Australian companies pay tax before distributing profits to shareholders. As a result, dividends often come with franking credits attached.

If your taxable income is low enough, those franking credits may be refunded to you when you lodge your tax return.

This is one of the reasons why Australian shares can be a particularly attractive investment for retirees seeking income.

Question 2: Why Is My Pension Taxable When Other Retirees Pay No Tax?

Another viewer, Aboud, contacted me with a question that causes a lot of confusion.

He had watched one of my videos discussing tax-free retirement income and wanted to know why his own pension remained taxable.

The answer lies in the type of superannuation fund he belonged to during his working life.

Most Australians today have an accumulation superannuation account. Contributions are made, invested, and grow over time depending on market performance.

However, many government employees and public sector workers participated in defined benefit superannuation schemes.

These funds work differently.

Instead of building a balance based on investment returns, retirement benefits are often calculated using a formula based on factors such as:

• Years of service
• Final salary
• Average salary over a period of time

For many members of defined benefit schemes, part of their retirement benefit may include what is known as an untaxed element.

This occurs because contribution tax was not always applied in the same way as it is in accumulation funds.

As a result, when pension payments are made in retirement, the Australian Taxation Office may still apply tax to that untaxed portion.

This is one of the key reasons why some retirees receive tax-free pension income while others continue to pay tax.

Question 3: Does Reaching Preservation Age Make My Income Tax-Free?

This is another common misunderstanding.

Many Australians believe that once they reach preservation age, all of their superannuation income automatically becomes tax-free.

Unfortunately, that is not always the case.

Preservation age simply determines when you may be eligible to access your superannuation under certain conditions.

It does not automatically determine the tax treatment of your retirement income.

Generally speaking, to receive tax-free income from an account-based pension, you need to:

• Meet a condition of release
• Commence a retirement income stream
• Be aged 60 or over

Simply reaching preservation age does not automatically make pension payments tax-free.

Understanding this distinction is important when planning your retirement strategy and deciding when to access your superannuation savings.

The Key Takeaways

Tax in retirement is often simpler than people expect, but there are some important exceptions.

Remember these three key points:

✔ Most account-based pensions are generally tax-free after age 60.

✔ Fully franked Australian shares may provide valuable tax benefits through franking credits.

✔ Defined benefit pensions may still be taxable due to untaxed elements.

✔ Reaching preservation age does not automatically make retirement income tax-free.

Every retirement situation is different, which is why it is important to understand how the rules apply to your personal circumstances.

If you would like to learn more about retirement planning, retirement income strategies, and ways to improve your financial outcomes in retirement, explore the resources available at About Retirement.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement