Retirement and the transfer balance cap

When looking to partially or fully fund your retirement lifestyle from your super benefits, there are several options available.

Looking to partially or fully fund your retirement lifestyle from your super benefits?

There are several options available

Depending on your personal circumstances, you can choose to take your super benefits as:

1. a lump sum,

2. a retirement income stream, or

3. a combination of both.

Most of us choose the third option; we take our super benefits as a retirement income stream (an account-based pension), and also take a small proportion of our super benefits as a lump sum (once or every so often).

Importantly, transferring your super benefits from accumulation phase to retirement phase by commencing an account-based pension, can be a tax-effective way to fund your retirement lifestyle:

  • Investment income and capital gains from the assets supporting a retirement phase pension are generally exempt from taxation.
  • Income (pension) payments and lump sum withdrawals paid to you from age 60, will generally be paid to you tax-free.

However, it’s also important to note that there is a limit to the abovementioned tax concessions, which came into effect from 1 July 2017. The limit is referred to as the transfer balance cap (TBC).

The TBC was introduced to limit the amount of super benefits that can be taxed concessionally, so these funds are used primarily for retirement as opposed to, for example, intergenerational wealth transfer.

How does the TBC achieve this?

The TBC limits the amount of super benefits that can be transferred to retirement phase (e.g. an account-based pension). This, in turn, limits the amount of super assets that are exempt from tax.

Please note: There is no limit on the amount of super benefits that can be held in accumulation phase, which has its own tax concessions.

Here is a summary of the key points relating to the TBC, with particular reference to those of us close to or nearing retirement and looking to commence a retirement phase account-based pension:

  • With the introduction of the TBC, also came other new concepts, such as the general TBC, the personal TBC, the transfer balance account, and the transfer balance (more on these below).
  • When you transfer your super benefits from accumulation phase to retirement phase for the first time, and commence an account-based pension, you must not exceed the general TBC.
  • The general TBC is currently set at $1.6 million (indexed) per person (not per account-based pension owned by a person) for the 2019-20 financial year.
  • The general TBC is indexed in $100,000 increments on an annual basis in line with the Consumer Price Index. Indexation of the general TBC to $1.7 million is expected to occur for the 2021-22 financial year.
  • Upon commencing an account-based pension, you also start to have a personal TBC, a transfer balance account, and a transfer balance – which remain with you until you pass away.
  • The personal TBC is initially equal to the general TBC for the financial year that you start to have a transfer balance account. However, the personal TBC can diverge from the general TBC over time.
  • The personal TBC is proportionally indexed in line with increases to the general TBC. For example, if only a portion of the personal TBC is used, then the unused portion is indexed, which works accordingly:

    • Let’s say, for example, you have a transfer balance of $800,000, and the general TBC is $1,600,000. This means you have an unused personal TBC percentage of 50%.
    • When the general TBC is indexed to $1,700,000, you’re entitled to 50% of the indexation amount, which is $50,000. This means that you now have a personal TBC of $1,650,000.

  • The transfer balance account operates similar to a bank account. The balance (the transfer balance) of the transfer balance account is the sum of credits, less the sum of any debits.
  • Amounts transferred to retirement phase are a credit in the transfer balance account. As an example, here are several events that can cause a credit in the transfer balance account:

    • Repayments of a limited recourse borrowing arrangement (LRBA).
    • Receiving a reversionary or non-reversionary death benefit income stream.
    • Commencing a retirement phase income stream, such as an account-based pension.

  • Certain transfers out of retirement phase are a debit in the transfer balance account. As an example, here are several events that can cause a debit in the transfer balance account:

    • Failing to comply with retirement income stream pension standards.
    • Commencing a retirement income stream after making a structured settlement contribution to super.
    • Receiving a full or partial commutation from a retirement income stream (e.g. cashing out or rolling over).

  • Investment earnings and losses in respect of the assets supporting an account-based pension, as well as pension (income) payments, are not debit or credit events.
  • A transition to retirement (TTR) income stream is not a credit event, until such time that a condition of release with a nil cashing restriction is met, such as reaching age 65.
  • Additional amounts can be transferred to retirement phase. However, it’s important to take care that these amounts don’t exceed the personal TBC.

    • A breach of the personal TBC can lead to excess transfer balance tax and the excess (and associated earnings) must be cashed out or transferred back to accumulation phase.

  • Lastly, the transfer balance cap differs from the total super balance in both its calculation and its effect on you. The total super balance determines your eligibility to utilise several wealth accumulation strategies:

    • The work test exemption.
    • The Government co-contribution.
    • The spouse super contribution tax offset.
    • The concessional cap carry forward provision.
    • Non-concessional contributions and the bring-forward rule.

Moving forward

While there is much to digest when it comes to the TBC, it’s important to note that this is a summary of the key points relating to the TBC and account-based pensions, not, for example, lifetime pensions.

In a nutshell, a limit applies to the amount of super benefits you can transfer to retirement phase to support an account-based pension. The limit is currently set at $1.6 million (indexed) per person.

Whether or not the limit will affect you will depend on your financial situation, goals and objectives. For context, according to the latest figures from ASFA, the super balance required for a comfortable retirement is:

  • $545,000 for a single.
  • $640,000 for a couple.

This assumes, among other things, you draw down all of your capital, and receive a part Age Pension.

However, if members of a couple wish to each target a higher super balance, fully utilising each of their transfer balance caps, contribution splitting and spouse non-concessional contributions can be valuable strategies worth considering, both now and into the future.

If you have any questions regarding this article, please do not hesitate to contact the award-winning team at Intuitive Super on 1300 856 064.

The information provided in this document, including any tax information is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out. Millennium 3 Financial Services Pty Ltd ABN 61 094 529 987, AFSL 244252.
Source: Financial Knowledge Centre

Last Updated:28-05-2020 11:57