Transfer balance cap explainer

The transfer balance cap scaled back virtually unlimited entitlements to a tax-free superannuation pension, but there are still tax-effective ways to manage your retirement income.

By John Wasiliev - 3 min 45 sec read

A little about John

John Wasiliev writes on personal finance specialising in superannuation and self managed super funds, managed funds and trusts.

As a baby boomer, I have experienced many changes to the superannuation rules, from the earliest concepts of superannuation in the 1980s, through generous incentives in the 2000s that encouraged us to build up our retirement savings, to more recent restrictions introduced from the 2010s onwards.

One of the biggest super changes in recent times was a restriction on how much super you can transfer into a tax-free pension account after age 60.

Introduced in mid-2017, this limit, called the transfer balance cap, scaled back virtually unlimited entitlements to a tax-free superannuation pension in retirement introduced in the 2000s.

The transfer balance cap is a very important need-to-know for anyone facing retirement.

Initially set at $1.6 million, the transfer balance cap increased to $1.7 million in mid-2021.

How does it work?

From the day you first receive a retirement income stream (after 1 July 2017), you will have what is called a transfer balance account with the Australian Tax Office, which records all transfers into and out of a super pension to determine whether you’ve exceeded you transfer balance cap at any time.

Before retirement, as well as when we move into retirement (as I have), we have a total super balance that represents all our super interests including:

  • pensions we have started – which we record in our transfer balance account, and
  • savings in accumulation accounts that haven’t been converted into pensions.

When we start a pension, the amount committed becomes a credit in the transfer balance account, showing how much of this cap has been used up.

Transfers to and from a pension

What is interesting about the transfer balance account is that it need not be a one-way movement of super from savings to pension phase—although there is a strong incentive to make this a one-way flow because savings in pensions are not subject to tax while investment earnings on amounts held in an accumulation are taxed at 15 per cent.

After starting a pension, you can make withdrawals (above regular pension payments) from your pension account should you need a lump sum for a major purchase or even money to gift to someone like a family member in need.

Where super is withdrawn from a pension account, this can be recorded as a pension conversion or commutation and can be treated as a debit in your transfer balance account so long as this is correctly reported to the Australian Taxation Office as a ‘transfer balance cap event’.

What is significant about superannuation transfer balance rules is that properly reported debits can ‘free up space’ for you to transfer money from your accumulation account into a pension in the future, subject to the limits of the transfer balance cap.

Super flexibility

Being aware of how transfer balance account credits and debits work highlights that starting a super pension isn’t necessarily a set-and-forget exercise. You don’t need to start a pension with your entire super balance in your 60s (when the super rules allow you to do so) and let it run down according to minimum pension limits.

Depending on your income needs, you could start a pension with part of your super and leave the balance in your accumulation account—but remember, investment earnings will continue to be taxed at 15 per cent.

Super pensions can be actively managed not just by taking less or more income as your needs dictate but also by making lump sum withdrawals.

You could even stop your super pension if you no longer need that income because other sources of income have emerged, like money from an inheritance or downsizing your home, for example.

Why you might consider this strategy and how to implement it is a topic I will explore in greater depth in a future column.

Changing times

Baby boomers like me—born between the end of the second world war to the mid-1960s—have experienced the 1980s super pioneering Hawke-Keating era, the generous 2000s Howard-Costello period, and the more restrictive 2010s Turnbull-Morrison superannuation era. Each of these have been distinct periods from a super savings perspective.

Hawke – Keating Howard – Costello Turnbull – Morrison
  • Introduction of tax on super contributions and benefit payments.
  • Introduction of rules that required you to keep your savings in super until you retired.
  • Beginning of compulsory employer super contributions, which from 1 July 2022 increased to 10.5%.
  • Moved from basically unlimited concessionally taxed contributions to the introduction of (still generous) contribution caps, such as allowing before-tax contributions of $100,000 a year for those over 50 and $50,000 for those under 50, and even a transitional one-off $1 million after-tax contribution allowance.
  • These high thresholds encouraged people to accumulate large super balances, which they could then withdraw, after age 60, as a tax-free super pension or lump sum.
  • Introduction of contribution options such as the $300,000 after-tax downsizer allowance from the sale of a family home.
  • Decrease in contribution cap levels i.e. before- and after-tax contribution limits, now $27,500 and $110,000, respectively.
  • Restriction on how much super you can transfer to a tax-free pension after age 60 i.e. the transfer balance cap.

While still attractive from a taxation standpoint, superannuation has at various times given baby boomers like me excellent opportunities to save for retirement through concessional super contributions tax.


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