Superannuation is great as an accumulator, but it becomes even more powerful in retirement phase—when you’re able to convert your super into an account-based pension.
Account-based pensions are essentially legal tax havens, which all Aussies have access to. Think of them as your own Swiss bank account—only better, because there’s no tax on income, capital gains or withdrawals once your money is in retirement phase. But, like all good things, there’s a catch.
You’re limited in how much you can transfer into retirement phase by the transfer balance cap, which is essentially the dam wall between accumulation phase and retirement phase. In this article, we explain how it works and how to make the most of it.
General transfer balance cap limit
As of the 2025/26 financial year, the general transfer balance cap is $2 million (increased from $1.9 last financial year). This is the maximum amount that can be transferred from accumulation into the retirement phase.
This cap applies across all your retirement-phase income streams, and it’s indexed in line with CPI. Once you make your first transfer into retirement phase, that cap becomes your personal transfer balance cap.
If you have a defined benefit pension, a separate defined benefit income cap also applies.
Your first transfer into retirement phase
When you first start an account-based pension, the current general transfer balance cap applies—$2.0 million for 2025/26. This becomes your personal transfer balance cap.
If you maximise the cap, no additional transfer can be made into retirement phase (unless there’s a debit, but more on this later). If you don’t use the full cap, you keep the unused portion for future use. Over time, your personal cap may increase via proportional indexation.
How much indexation you receive depends on the highest-ever balance recorded in your transfer balance account. Let’s look at an example.
Example
Let’s say you start an account-based pension this year by transferring $1 million from accumulation. That means you’ve used 50% of the $2 million cap, which becomes your personal transfer balance cap.
Down the track, if the general cap increases to $2.4 million, you’ll receive 50% of that $400,000 increase—so $200,000. Your new personal cap would be $2.2 million, giving you additional room to move more super into the tax-free retirement phase.
Managing your transfer balance account
Once you make that first transfer, a transfer balance account is created to track your usage via a credit and debit system:
- Credits: Transfers into retirement phase.
- Debits: Lump-sum withdrawals or commutations back to the accumulation phase.
There are some other nuance credits and debits but to keep things simple, I won’t bore you with those.
The important point to note here is that regular pension payments are not debits and can’t be re-credited. Given this, if additional funds are required, you’ll need to decide whether to take them as a pension payment (which doesn’t affect your cap) or as a lump sum (which does free up cap space).
You can monitor your transfer balance account through the ATO portal linked to your MyGov account.
Excess transfer balance tax
If you exceed your cap, you’ll cop the Excess Transfer Balance Tax. This tax claws back the benefit of any excess amount held in a tax-free pension account:
- First Breach: Taxed at 15% of notional earnings
- Further breaches: Taxed at 30%
One common trap – Reversionary pensions. If your spouse passes away and their pension reverts to you, it’s credited to your transfer balance account and could push you over the limit.
The Guided Investor approach
The transfer balance cap is most relevant for wealthier retirees—those in Phase 4 of Wealth Creation – where we want to live financially independent and free of the pesky tax man. The goal is to ensure that as much of your super as possible sits in the tax-free retirement phase.
For amounts exceeding the transfer balance cap, careful consideration is needed: should the excess be retained in the accumulation phase, where earnings are taxed at 15%, or invested outside of superannuation? Tailored Advice is critical in these situations.
