The level of tax that you are required to pay on pension income depends primarily on your age and the type of pension.
Account Based Pensions/ Allocated Pension
Paying Tax on Pension Income – Over age 60
All income received from an Account Based or Allocated Pension is received tax free for those over age 60. This has been the case from 1 July 2007 when the Simpler Super measures were introduced.
However, if part of your income includes a taxable (untaxed component) – common in public servant defined benefit schemes – this portion will be taxed at your marginal tax rate, less a 10% tax offset.
Paying Tax on Pension Income – Preservation Age to Age 60
If you are above your Superannuation Preservation Age yet below age 60, tax may be payable on some or all of your pension income. The portion of your income stream that is taxable is based on the components that make up your Pension account balance. A higher tax may be payable if you are still working, as part of the income may be taxed at your marginal tax rate.
Every Pension account will be made up of a Taxable Component, a Tax-Free Component or a combination of the two. You can check your superannuation statement, log on to your superannuation account online or contact your superannuation provider to find details regarding the components that make up your Pension balance.
The proportions that make up your Pension balance will remain constant throughout the life of your Pension. For example, if you have a Pension balance of $100,000 that consists of $60,000 Taxable component and $40,000 Tax-Free component, your Pension component proportion will always be 60%/40% split – regardless of the total account balance.
Furthermore, all income that you withdraw from your Pension (as well as any lump sum commutations), must be withdrawn proportionately from each component. Therefore, based on the proportions above, if you withdrew a Pension Income of $1,000/month, $600, of this would consist of the Taxable Component and $400 of the Tax-Free component.
In all instances, the Tax Free component is received tax free. The Taxable Component is taxed at your Marginal Tax Rate (MTR), however, you receive a tax offset equal to 15% of the Taxable Component draw down (i.e. tax offset of $90/mth in the example above). If part of your Taxable Component pension income consists of an Untaxed Element (this is fairly uncommon with Account Based and Allocated Pensions), this portion will be taxed at your MTR with no tax offset.
Paying Tax on Pension Income – Below Preservation Age
If you receive an income from an Account Based or Allocated Pension and you are below your Preservation Age, the income received will be taxed at your MTR with no tax offset – irrelevant of the type of component.
Tax on Defined Benefit Schemes
All the public servant defined benefit schemes have a taxable component that commonly has an Untaxed Component (unfunded source). These schemes also usually have a 15% tax offset on the Taxable Component from Preservation Age to under 60 years of age and a 10% tax offset on the Untaxed Component over 59 years of age.
Centrelink Age Pension Income
The full amount that you receive from the Centrelink Age Pension is combined with all other taxable income received and taxed at your Marginal Tax Rate.
If you would like anything clarified or have any further questions about Paying Tax on Pension Income or any other topics, please do not hesitate to leave a comment.
