Tax is something you need to consider in all aspects of your financial planning, whether you’re working, retired or starting to transition to retirement. Tax rules and regulations can be complicated, and the rules can be different based on how and when you access your super.

If you choose to receive regular payments from your super once you retire or start to transition to retirement, this is known as an account-based pension. At GESB, we have a range of Retirement Income (RI) account-based pensions including our Transition to Retirement Pension (TTR), RI Allocated Pension or RI Term Allocated Pension.

Here are some common myths about the way tax might apply to your account-based pension – and the truth behind each one.

Myth #1: ‘Untaxed’ and ‘tax free’ are the same thing

In Australia, most super funds are 'taxed' funds, which means the tax is paid up front, except for a small number of public sector funds, which are ‘untaxed.’ Untaxed doesn’t mean that no tax applies. Instead, tax is only charged when your benefit is paid or rolled over to a taxed scheme.

The Gold State Super, West State Super and WA Public Sector Pension schemes are all untaxed schemes. If you’re planning to transfer to an account-based pension from one of these accounts, you’ll pay tax on the taxable component (untaxed element) of your benefit when you set up an account-based pension.

Myth #2: Your super is tax free when you draw an account-based pension

Actually, the way tax applies to your retirement income depends on your age, the type of account you have and other factors.

Generally , if you’re aged 60 or over and your entire benefit is from a taxed fund (such as RI Allocated Pension), your account-based pension will be tax free. Your investment earnings will also be tax free.

If you’re aged between 55 and 59, your income payment is likely to have a taxable and tax-free component. You’ll still pay tax on the taxable component. If you’re aged under 55, you’re generally not eligible for an account-based pension, but if you are permanently unable to work you could apply to access your super in this way. Note there may be tax consequences if you access your super under the age of 55.

Myth #3: Tax rules apply to all of your super in the same way

The tax treatment can differ on different elements of your super account. For example, if your income is being drawn from your RI Allocated Pension account, this account could include two different parts or ‘components’. Each part is taxed differently, depending on where the funds come from. You might have:

• A tax-free component
  This is the tax-free part of your super benefit that was transferred to your pension account. You don’t pay tax on this amount. It will include any personal contributions you have made that you haven’t claimed a tax deduction for.

• A taxable component
  This is the taxable part of your super benefit that was transferred to your pension account. It will include your employer and salary sacrifice contributions. Your pension payment will include this component and you may need to include this in your assessable income if you’re under age 60.

When you’re working out the most tax-effective strategies for your retirement, it’s worth speaking to a qualified tax accountant to learn how tax applies to your unique situation.