From 1 July 2021, the general pension transfer balance cap will increase from $1.6m to $1.7m due to indexation. If you’re thinking of retiring and have a large amount in your transfer balance account, it may be wise to plan ahead so you can take advantage of this increase. By way of background, the transfer balance cap started on 1 July 2017 and is effectively a lifetime limit on the total amount of super that can be transferred into retirement phase income streams, this includes most pensions and annuities.
The cap takes into account all retirement phase income streams and retirement phase death benefit income streams, but the age pension and other types of government payments and pensions from foreign super funds do not count towards the cap.
For example, if you decided to retire before 1 July 2021 and your transfer balance account shows an amount in excess of the $1.6m cap, you would have to either:
commute the excess from one or more retirement phase income streams (ie convert a portion of your retirement phase income stream into a lump sum); or
pay tax on the notional earnings related to that excess.
If, however, your retirement phase account grows over time through investment earnings to be more than the cap, you won’t be deemed to be exceeding your cap. Conversely, if the amount in your retirement phase account goes down to below the relevant cap, you can’t top the account up if you’ve already used up all your cap at the time of commencing the pension.
Remember, the transfer balance account is not the same as your total superannuation balance. The two are calculated differently and are not related. So, if you’re close to making the decision to retire, the easiest way to take advantage of the increase in the cap is to wait and start your first retirement phase income stream on or after 1 July 2021.
Tim commenced a pension on 1 July 2020 valued at $1.6m (the maximum cap at the time) and has other assets in super. In order to take advantage of the indexation increase in the cap, Tim commutes his pension in full on 30 June 2021 and gets a debit of $1.6m in his transfer balance account on that day. The balance of Tim’s transfer balance account at the end of the day on 30 June 2021 will be nil. He plans on starting a new pension valued at $1.7m on 1 July 2021.
However, since Tim had a balance in his transfer account balance of $1.6m or more between 1 July 2017 and 30 June 2021, he will not be entitled to a proportional indexation of his personal transfer balance cap and it will remain at $1.6m. If he starts a new pension valued at $1.7m, he will have an excess transfer balance that he will need to commute and will also need to pay excess transfer balance tax.