What is the transfer balance cap?

As you approach retirement, it may be helpful to understand the sometimes complex rules that apply to how individuals can access their superannuation. The transfer balance cap is one example.

It can have an impact on what happens when you transition from the accumulation phase of super (typically when you are working) and the retirement phase, which commences when you have retired or begun the transition to retirement and are eligible to access your super savings.

What is the transfer balance cap?

The transfer balance cap is the limit on how much money an individual can transfer from their accumulation superannuation account into a tax-free retirement phase pension account (such as an account based pension), according to the Australian Taxation Office (ATO).

A single cap applies to an individual even if they have multiple pension accounts.

For the 2020/21 financial year, the transfer balance cap is $1.6 million but it may increase in the future, in increments of $100,000, in line with inflation as measured by the consumer price index.

The ATO says that if the transfer balance cap is indexed to $1.7 million in the future, that amount will apply to anyone who enters the retirement phase after that point.

For those who are already in the retirement phase prior to the cap increasing, their personal cap will be set at somewhere between $1.6 and $1.7 million, depending on their circumstances.

It’s worth noting the transfer balance cap is not a one-time limit, as it applies throughout your lifetime – in other words, the total money you move on your initial transfer, combined with any subsequent transfers you make into your retirement accounts, are subject to the same overall cap.

How much space you have within the cap can also change for a variety of reasons, so it may be something to keep an eye on throughout the pension phase of your retirement.

How does the transfer balance cap work?

As soon as you receive a retirement phase income stream for the first time – in other words, whenever you first transfer funds from your accumulation super account into a pension to draw down income to live on – the ATO will establish a transfer balance account for you.

This account keeps a tally of how much you have available within your transfer balance cap, or by how much you are exceeding it.

For example, if, hypothetically, you become eligible to access your super, and you transferred $1.2 million into a pension account, the value of your transfer balance account would be $1.2 million.

This balance may then go up or down based on certain credits or debits. However, the value of your transfer balance account will not necessarily remain the same as your pension balance.

For example, if the value of your superannuation savings held within your retirement phase accounts grows due to investment returns, this will not impact how much of your transfer balance cap you have left.

Similarly, if your retirement phase savings drop in value due to investment losses and as you gradually draw down on your pension to meet your living costs, the tally in your transfer balance account will not be reduced by these debits.

Transfer balance cap example

The ATO offers the following hypothetical example to illustrate this and how it could have an impact on individuals in certain situations:

Richard started a pension valued at $1.6 million on 1 July 2017. This uses up all his personal transfer balance cap.

By 1 July 2019, the value of that pension account had grown to $2.0 million. As this growth is due to investment earnings, Richard has not exceeded his personal transfer balance cap.

On 30 June 2020, the value of that pension account had fallen to $1.0 million due to the impact of COVID-19 on the assets supporting the pension. Richard cannot ‘top up’ his pension account with money he holds in his accumulation account because he has already used all his personal cap space.

The ATO explains that if an individual reaches their balance transfer cap, then while they cannot transfer more of their super into their pension account without exceeding their cap, they may still be able to withdraw funds from their accumulation super account as a lump sum, or convert any excess income from a retirement income stream into a lump sum withdrawal.

What happens if I exceed my transfer balance cap?

If you exceed your transfer balance cap, you become liable to pay excess transfer balance tax, according to the ATO.

This would apply only to the amount you are exceeding the cap by.

At the time of writing, the excess transfer balance tax rate is 15% the first time you go over the cap, and 30% on subsequent occasions.

The ATO says you will have 21 days to pay this tax, and may be charged interest on it if you do not meet this deadline.

In addition, if you meet or exceed the transfer balance cap, you would permanently lose your entitlement to increase your transfer balance cap by indexation in future years.

If you exceed the cap, the ATO says you must commute a portion of your superannuation income stream in order to reduce the value of your transfer balance account.

Getting advice on the transfer balance cap

Because this is a complex area of superannuation, it may be worth seeking professional advice prior to entering the retirement phase of super to understand how the transfer balance cap may apply to your situation.

Even if some or all of your super is already in the retirement phase, it could be beneficial to get advice before making any further significant decisions relating to it, as there could still be knock-on effects on your transfer balance account.

It’s also worth noting that the rules around the transfer balance cap can vary depending on the type of pension you have.

For example, different rules may apply to those with a defined benefit pension or an annuity.

If you need advice, you could speak to your superannuation or pension provider for guidance, or seek the support of a financial advisor who may be able to help.

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