Why retirees can't afford to ignore tax time

It is often assumed that tax is only a concern for working-age people, but this couldn't be further from the truth.

"Once you've retired, it's dangerous to assume you no longer need to lodge returns," says financial planner Chris Giaouris from Chronos Private Wealth.

"You can still adopt tax-effective strategies after you retire."

As the adage goes, the only certainties in life are death and taxes. And this still applies in retirement.

Managing retirement income

Superannuation can be drawn down via a lump sum or an income stream.

If you're 60 or over, the entire benefit from a super fund is tax-free regardless of which avenue you choose to take.

While superannuation can be withdrawn in a lump sum before 60, it is not overly common because it will incur tax.

If you're between 55 and 60, taking out a lump sum will be taxed at 15% over and above $225,000, the low rate capped threshold.

Still, taking a lump sum before 60 can be a valuable option for people receiving Centrelink benefits.

"Where there is a discrepancy in age between spouses, we will often leave a lot of money inside one spouse's superannuation account because it is exempt from Centrelink," says Giaouris.

"However, when you're drawing a lump sum before 60 out of an accumulation fund, it's taxed at 15%, so those still on Centrelink need to weigh up whether the Centrelink benefit is worth it against paying 15% on the lump sum."

More common is a pension structure.

"The majority of other clients will start a pension, and once you get over 60 those pensions become very tax-effective because the pension is tax-free, so you won't pay tax on investment earnings, capital gains, interest, dividends, anything that the pension account is earning."

Financial planner Nicola Beswick from FMD Financial also points out that the underlying assets within the super account are not subject to capital gains tax and income from the assets is also tax-free. Compared to if money is in the accumulation phase, the underlying assets are subject to capital gains tax and income tax.

"This underlying tax difference is important for someone to understand too and how they may want to structure their affairs."

Deductions

There is a hard and fast rule when it comes to deductions: deductions can be made on expenses incurred in the process of earning income.

That could include investment property maintenance costs such as agent fees and loan interest, as well as some advice fees. Basically, anything that costs money in the pursuit of generating income is deductible.

Correction: An earlier version of this story said retirees may be able to deduct medical expenses. This has not been available since July 1, 2019. Also, the low rate cap for 2021-2022 is $225,000 not $250,000 as originally stated.

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