How Australians Can Reduce Tax in Retirement


Reducing the amount of tax you pay in retirement should leave you with more money for other priorities, such as your day-to-day living expenses, travelling and more. Once you’ve retired, your options for reducing taxes typically include offsetting your assessable income with deductions and keeping your money in a tax-effective investment vehicle. For most Australians, Superannuation is the most tax-effective investment structure in which you can invest.

In this post, we’ll talk about what you can do now to reduce taxes later on in retirement. With tax reduction as a key goal, you can set yourself up for the retirement lifestyle of your choice. Let’s take a look at a range of smart, tax-effective strategies you can use in your personal retirement planning.


Set Up Insurance Through Super

Many people buy insurance through their super because they get better rates when they take up cover through a group insurance scheme. Currently Employer default super funds are required to offer a minimum level of life insurance, depending on your age. These plans often allow you to increase, decrease and even cancel the default insurance amount. 

Premiums for these policies are usually deducted from your super account balance (in some instances your employer may fund part of the premium for you as an employee benefit), so you’ll need to carefully consider how your insurance will affect the money you have available for retirement. With careful planning, however, you can still maximise your retirement savings while still gaining the tax benefits that accompany purchasing insurance through your super. One of the ways you can buy insurance through super without taking a hit to your retirement balance is by salary sacrificing the cost of the premiums. 

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When you salary sacrifice to cover the cost of your insurance premiums, you benefit by having your premiums paid in pre tax dollars and free up the funds that were otherwise going to be used to pay the premiums to grow. Over the years, this arrangement may save you money on your taxes while protecting your family.


Maximise Your Caps to Pay Less Tax

Take full advantage of your concessional contribution cap each year between now and when you retire. This strategy can maximise your retirement savings so you have more money to live on during retirement. 

Concessional contributions are contributions made to your super fund in pre-tax dollars. Generally speaking, concessional contributions are taxed at 15%. They include employer contributions, salary sacrifice contributions and personal contributions for which a tax deduction is being claimed, and they’re subject to a yearly cap. 

From 1 July 2017, the concessional contribution cap is $25,000 for all individuals. When you maximise your cap, you receive the maximum tax benefits for contributing to your super.


Salary Sacrifice Into Super

Salary sacrificing can be one of the most tax-effective strategies available for retirement planning.

Not only can salary sacrificing be effective at reducing taxes, but it’s also extremely easy. Many businesses offer the option of salary sacrificing. You simply increase the amount you pay to your super, and your employer handles the transfer during the pay run. 

Of course, your take-home pay will be reduced when you send more of your earnings to your super, and this may be financially difficult for a time. You’ll need to consider how salary sacrifice will affect other parts of your financial life as well. For instance, it might affect your maternity pay or even mortgage applications. You may also want to find out how your lower earnings could affect your Pension or other benefits.

Talk with the human resources team at your business to learn about the terms and conditions they offer. It can also be helpful to talk with your wealth adviser about how best to proceed regarding salary sacrifice and reducing your tax in retirement.


When to Start Thinking About Reducing Tax in Retirement

There’s no need to wait until you’re approaching retirement to start thinking about ways to reduce taxes. In fact, the earlier you start planning, the more effective your strategy will be. 

Start today to take steps toward planning your retirement and making the most of your future. As you discuss your retirement planning needs with your adviser, consider that lifestyles tend to change during retirement. In early retirement, most people have considerable energy levels and want to visit with family and friends, take trips and even explore new hobbies.

In mid-retirement, some people start to slow down. Some downsize to smaller homes where they don’t have to spend so much time doing housework. For some people, financial attention starts shifting from travelling to taking care of their health. Then in late retirement, aged care becomes a priority. All of these phases of retirement require careful planning and attention, and the more you plan now, the more comfortable you’ll be later on.

Get in touch with us at Altus Financial for more information or to speak with an adviser.

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Matt Smith

As a Director of Altus Financial, Matt helps his clients solve their financial problems and plan their futures. Whilst it sounds like a cliché, to have the best chance of achieving that to which you aspire you must first know what you're trying to achieve. Having facilitated discussions to achieve this clarity, Matt then utilises his experience to deliver sophisticated solutions in simple language. Let's Connect