Many people assume that once they retire, their tax obligations will significantly decrease. While this is often true for PAYE income tax, it’s not always the case for superannuation, especially if you have a self-managed super fund (SMSF). Without proper planning, you could find yourself paying more tax than necessary, reducing the income available to enjoy your retirement. Understanding how to structure your superannuation effectively can help minimise tax liabilities and maximise returns. Seeking professional guidance, such as professional SMSF accounting services, can ensure you’re taking advantage of the best strategies at every stage of retirement.

Still Working? Salary Sacrifice Can Help

If you’re still working, salary sacrificing into your superannuation fund is one of the best ways to reduce your taxable income while boosting your retirement savings. Salary sacrifice allows you to contribute a portion of your pre-tax earnings into your super fund, reducing the amount of income subject to PAYG tax. These contributions are taxed at a concessional rate of 15%, which is typically much lower than personal income tax rates.

However, it’s important to stay within the concessional contributions cap, which for the 2024/25 financial year is $30,000. Any contributions exceeding this cap may attract additional tax penalties, so monitoring contributions closely is essential.

Transitioning to Retirement – Move Your Super Out of Accumulation

One of the most overlooked ways retirees overpay tax is by leaving their super in an accumulation account. Research has found that approximately 700,000 Australians over 65 who are no longer working full-time still have their super in accumulation mode. Collectively, these retirees hold around $90 billion in accumulation accounts, paying an estimated $650 in extra tax per person annually.

Superannuation accounts typically have two phases:

  1. Accumulation phase: This is the default phase while you’re still working, where earnings within the fund are taxed at 15%.
  2. Pension phase: Once you retire, you can convert your super into an income stream. Investment earnings in this phase are tax-free, and withdrawals are also tax-free for those over 60.

Leaving superannuation in accumulation mode after retirement means you continue paying tax on earnings unnecessarily. However, if you transition to a pension account, you eliminate this tax, ensuring that all earnings from investments remain in your account rather than being deducted by the ATO.

Other Strategies to Reduce Tax in Retirement

Aside from salary sacrifice and transitioning to a pension account, there are several other ways to ensure you’re not overpaying tax in retirement.

  •  Ensure your withdrawal strategy is tax-efficient: If you have multiple income sources, withdrawing from super before other taxable investments may help lower your overall tax burden.
  • Take advantage of the work test exemption: If you’re between 67 and 74 and recently retired, you may still be able to make voluntary contributions to super without meeting the work test requirements.
  •  Use spouse contributions and splitting strategies: These can help balance super balances between partners and maximise tax efficiency.
  •  Consider downsizer contributions: If eligible, selling your home and contributing up to $300,000 into super can help increase your tax-free earnings while freeing up capital.

The More You Plan, the More You Save

A well-structured retirement plan ensures you retain more of your hard-earned money rather than losing it to unnecessary taxes. Taking proactive steps, such as moving out of accumulation mode, utilising salary sacrifice, and structuring withdrawals efficiently, can make a significant difference in your financial security. The sooner you implement these strategies, the greater the long-term benefits.