Author: Emma Partenza, Manager, TAG Financial Services
Effective from 1 July 2021, the transfer balance cap (TBC) is set to increase to $1.7m, the first time we have seen an increase since its inception on 1 July 2017.
This will result in pensioners no longer having the same, single, general transfer balance cap of $1.6m for amounts in retirement phase.
The transfer balance cap is the amount a pensioner can have in a tax-free retirement phase income stream.
Those members who are already in receipt of a retirement phase income stream and have maximized their $1.6m TBC for retirement phase pensions prior to 1 July 2021 will not benefit from the increase in the cap. Effectively they will be unable to put additional amounts into retirement phase, where earnings are tax free, as they have utilised 100% of the TBC.
Members who have commenced retirement phase income streams prior to 1 July 2021 but have not maximized their $1.6m cap, will have a proportional increase in their cap, but not of the full additional $100,000 amount up to $1.7m. A cap increase for these members will be calculated on the unused portion of their current cap multipled by the increase in the cap. This is based on the members highest ever TBC.
Example
Julie commenced a retirement phase income stream on 1 July 2020 for $960,000 upon turning 65. Her transfer balance cap is $1.6m with a remaining balance of $640,000 or 40%. Julie will be entitled to 40% of the cap increase of $100,000; being $40,000. The new transfer balance cap will become $1,640,000.
New pensioners who have yet to commence a retirement phase income stream will have the full transfer balance cap of $1.7m.
The Transfer Balance Cap “measure” is not simply the member’s amount in pension phase at 1 July 2021 – the ATO will use the member’s highest ever TBC to determine the extent of available indexation.
Example
John started an account based pension on 1 July 2017 for $1.6m. He commuted this fully back into accumulation mode on 1 July 2019 as he no longer needed the regular pension payments. While he now has no active pension, his personal TBC will not gain the benefit of indexation as the highest amount counting towards his Transfer Balance Account was $1,600,000.
Important Considerations
You can see that this system, with the first bout of indexation, is about to create some added opportunities. It may also create a fair bit of confusion.
Careful planning of members transfer balance caps will need to be undertaken to ensure no excess is created for any further amounts put into the retirement phase. It is not a set increase for every pensioner.
Strategically, we should consider whether it is worth commencing a pension prior to 30 June 2021 knowing that waiting until July may provide more room under the cap.
Any Questions
If you have any questions regarding the changes to caps, please contact us on 03 9886 0800 or via email.
What should you do now?
Become Money Smart
Build your financial knowledge and join our online community where you will receive TAG updates and invites to our Information Sessions.
Meet with us
If you would like to discuss the superannuation Transfer Balance Cap, contact us to arrange a time.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).