Superannuation is good as an accumulator, but it becomes even better in retirement phase, when you become eligible to transition your super from accumulation phase, into retirement phase using an account-based pension.
Account-based pensions are a legal tax haven – it’s like a Swiss bank account that every Aussie has access to. There is no tax payable on any income, capital gains or withdrawals when super money is held in an account-based pension. However, there’s a catch.
You are limited as to how much you can transfer into retirement phase by the transfer balance cap limit. In this article we explain exactly how it works.
General transfer balance cap limit
The current limit in the 2024/25 financial year is $1.9 million. This is the maximum amount that can be transitioned from the accumulation phase to retirement phase.
The cap applies cumulatively to all retirement-phase accounts and is subject to incremental indexation based on increases to the Consumer Price Index (CPI). Once you trigger the transfer balance cap, it becomes your personal transfer balance cap.
For those with defined benefit pensions, a defined benefit income cap also applies, which is separate from the transfer balance cap.
The first transfer into an account-based pension
When you first transition into retirement phase, you are subject to the general transfer balance cap limit, which then becomes your personal transfer balance cap.
If you maximise the cap, no additional transfer can be made into retirement phase. If you don’t utilise the full amount, you retain the unused portion for future us, with your personal transfer balance cap indexed over time.
Indexation is proportional and based on the highest-ever balance in your transfer balance account. Let me give you an example.
Example
Suppose you commence an account-based pension in the current financial year, transitioning $950,000 from the accumulation phase to the retirement phase. This means you’ve utilised 50% of the $1.9 million general transfer balance cap, and $1.9 million becomes your personal transfer balance cap.
Later, if the general transfer balance cap increases to $2.3 million due to CPI indexation, your personal transfer balance cap will also increase, but only in proportion to the amount of unused cap space.
Since you’ve used 50% of your cap, you’ll receive 50% of the $400,000 increase ($2.3 mil – $1.9 mil), resulting in a $200,000 boost to your cap. Your new personal transfer balance cap would be $2.1 million, and you could transition an additional $1,150,000 into the retirement phase.
Managing your transfer balance account
After the first transfer into an account-based pension, a transfer balance account is created to record debits and credits against your personal transfer balance cap.
- Credits: Transfers from the accumulation phase to the 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 pension payments are not debits from your transfer balance account and cannot be re-credited. Given this, if additional funds are needed, you’ll need to decide whether to take them as a pension payment (which doesn’t impact your cap) or as a lump sum (which reduces your transfer balance account).
You can monitor your transfer balance account through the ATO portal linked to your MyGov account.
Excess transfer balance tax
If you exceed your transfer balance cap, excess transfer balance tax will apply. This tax basically reverses any tax benefit you may have received by holding more than you are allowed in a tax-free pension account.
In the first instance, the excess transfer balance tax is calculated as 15% of the notional earnings on the money above the transfer balance cap. Subsequent breaches are taxed at 30%.
Where people can often get caught out is when someone receives a reversionary pension following the death of a spouse. The death benefit income stream is credited to the recipient’s personal transfer balance cap and may push them over the limit.
The Guided Investor approach
The transfer balance cap is most relevant for wealthier retirees in Phase 4 of Wealth Creation. To maximise benefits, it’s essential to work within the cap’s rules, ensuring that as much as possible is held in a tax-free pension account.
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? Strategic advice tailored to your circumstances is critical in these situations.
