How is retirement income taxed in Australia – and how could it benefit you?

From age 60, your super can become tax-free in retirement – but only if you structure it the right way. For many people, that means one of the biggest financial advantages of retirement can also be one of the easiest to overlook. 

Once your regular pay stops, the focus shifts from building wealth in your super to turning it into retirement income. And how you do that matters. The way you access your super can affect how much tax you pay, how long your savings last, and whether your money keeps working as efficiently as it can in the background. 

That's where retirement income can start to feel more complex than expected. You might be weighing up a lump sum, a retirement income stream or a mix of both. While they can feel similar on the surface, the tax outcomes can differ. 

The good news is the rules often become simpler from age 60. For most Australians, withdrawals are typically tax-free, but that doesn’t always mean your super is working as tax-effectively as it could be. Below, we explain the way your super is structured can affect whether investment earnings inside your fund continue to be taxed. 

How is super taxed from age 60? 

Turning 60 is where things become simpler, and more favourable. To understand why, it helps to look at how super is taxed along the way. 

While you're working, super is generally taxed at a reduced rate. Most contributions going in (like employer contributions or salary sacrifice contributions) are usually taxed at 15%, and the investment earnings are taxed at up to 15%. These rates are typically lower than your personal income tax rate, which is part of what makes super such a tax-effective way to save. Note, high-income earners may need to pay more tax over certain amounts. 

From age 60, things shift. For most Australians in a taxed super fund, both of the following are generally tax-free: 

• regular payments from an income stream 

• lump sum withdrawals 

That means your super can move from being a savings pool to a highly efficient income source. 

A small group of people – mainly those in some public sector or some defined benefit schemes – may still pay some tax on withdrawals after 60. If you're not sure which type you're in, it's worth checking with your super fund or a financial adviser. 

Are you paying tax on your super you don't need to? 

If you’re over 60 and haven't moved your super into a retirement income account, the answer is probably yes! 

The tax break at 60 isn't automatic. Yes, withdrawals become tax-free – but the earnings inside your fund only become tax-free when you move your balance into one or more of the retirement income stream types (like a flexible retirement income stream - also commonly called an account-based pension - or a lifetime retirement income stream). Leave it in accumulation, and those earnings keep getting taxed at up to 15%, even after you've stopped working. 

As an example, on a $500,000 balance earning 6% a year, that's potentially up to $4,500 in tax annually that could otherwise stay invested and working for you. 

This doesn't happen by default. You need to actively notify your super fund to start an income stream to unlock the full tax benefit – something many Australians don't realise until years into retirement. 

What's the tax difference between a lump sum and an income stream? 

From a tax perspective, both options can be tax-free after 60. But the big difference is what happens next. 

A lump sum moves some or all of your money out of super. Once it's out, any earnings that money generates (e.g. interest earnings, dividends from shares, or rental income) are taxed at your personal income tax rate. 

A retirement income stream works differently. It keeps your money inside super, but moves it from the 'accumulation phase' (where you're building your balance) into the 'retirement phase' (where you're drawing an income). In retirement phase, investment earnings on the money supporting your retirement income stream are generally tax-free. The amount you can transfer into retirement phase is subject, up to a Government-set limit known as the transfer balance cap. 

Over time, keeping money in a tax-efficient environment can make a meaningful difference to how long your savings last. It's one reason many retirees use a mix: taking some as a lump sum upfront, while leaving the rest working in the background. 

What is a transition to retirement (TTR) account? 

If you're not quite ready to retire, a transition to retirement (TTR) account can help you ease into it. 

It gives you access to some of your super while you're still working, but it doesn't come with the full tax benefits just yet. In particular, investment earnings inside a TTR are still taxed at up to 15%, the same as in accumulation phase. 

What should I do next? 

A good place to start is understanding your own setup: the type of fund you have, and how your balance is structured. 

From there, you can begin to shape how your income looks in retirement – not just how much you draw, but how it's delivered over time. That might include a flexible retirement income stream for flexibility, a lifetime retirement income stream for guaranteed income for life, and topping up your retirement income with the Age Pension if you're eligible. Many retirees use a combination of all three. 

Tools like our Retirement Simulator and Retirement Needs calculator can help you explore: 

• How much you might need 

• how long your super will last 

• what income it could provide 

• Age Pension eligibility 

• how lifetime and flexible retirement income streams could help you get the most out of your super savings 

Paying for personal financial advice can feel like an out-of-reach expense for many. For AMP Super members who want personal guidance and advice, AMP Super’s Digital Financial Advice is available for no extra fees. It can help you understand where you stand, provide recommendations on the best mix between lifetime and flexible retirement income streams and explore possible next steps. And if you'd rather speak with someone directly, you can book a chat with one of our intrafund advisors and get guidance tailored to your needs, also with no extra fees.