What is the transfer balance cap?
The retirement phase, formerly known as the pension phase, is when you are paid an income stream by your super fund. The ATO advises that any earnings made on your investments in the retirement phase are exempt from taxation. This is in contrast to the accumulation phase where, as ASIC notes, earnings are subject to a 15% tax. Typically, you would be in the accumulation phase while working and earning super guarantee contributions, and you would switch to the retirement phase upon retiring. However, the new transfer balance cap may mean that a portion of your superannuation remains in the accumulation phase, even while you draw a super income stream.
Introduced to combat retirees receiving substantial tax exemptions on their super savings, the transfer balance cap means that any savings in excess of the cap will need to be either withdrawn as a lump sum or reverted to an accumulation account. There is no cap on how much you can hold in accumulation accounts.
The ATO advises that currently, for financial year 2018-2019, the transfer balance cap is set to $1.6 million, and will be indexed in $100,000 increments according to the Consumer Price Index (CPI). The specific amount of indexation that you will receive depends on the available transfer balance cap space you have. If that cap is entirely used you will not be eligible for any future indexation.
The ATO notes that everyone will have their own transfer balance cap, which will be the difference between the $1.6 million cap limit and however much of your savings you have transitioned into the retirement phase. For example, if you transfer $1.2 million, your remaining cap, and the amount that will be eligible for any future indexation will be $400,000. If you were to then make a further transfer of $100,000 into your retirement account, your new transfer balance cap would decrease to $300,000. However, generally any earnings that your savings in the retirement phase make will not count towards your cap. So, if you earn an additional $100,000 through investing your retirement phase savings your cap will not decrease. Also note that typically withdrawals from your retirement account do not correspondingly increase your cap.
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The transfer balance cap applies retroactively, meaning any income streams commenced prior to 1 July 2017 still counts for you remaining cap. New income streams will count towards your personal cap when they commence. If you exceed your cap, you may have to remove the excess from your retirement phase account and pay tax on the associated earnings.
The transfer balance cap applies to everyone, including people with Self-Managed Super Funds (SMSF) and those in a defined benefit fund. There are some differences in the treatment of these types of funds that can be quite complex, and you should talk to your fund manager or a financial advisor about your specific situation.
While the transfer balance cap applies to everyone, the government has estimated that under 1% of fund members will have earnings in excess of the cap. Nevertheless, you should be aware of how much super you have saved, and if this will put you in breach of the cap.
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