Understanding the $1.7m transfer balance cap

Finance expert Noel Whittaker, explains the ins and outs of the superannuation transfer balance cap – and don’t miss your chance to hear Noel discuss the pros and cons of our pension system at our free webinar.

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Key Points

  • The transfer balance cap is the amount of superannuation you can transfer tax-free over a lifetime to retirement income streams, including pensions. 

  • The transfer balance cap recently increased to $1.7m. 

  • Noel will be a guest presenter at our upcoming free webinar to discuss the pros and cons of the pension system. 

In 2016, the Turnbull government made major changes to superannuation, which took effect from 1 July 2017.  

The changes restricted how much you could have in low-tax superannuation environments and reduced concessional contributions to $25,000 a year and non-concessional contributions to $100,000 a year.  

Furthermore, they reduced the amount that could be held by retirees in the zero-tax pension phase by introducing a transfer balance cap, limiting the amount an individual can transfer into their pension fund to $1.6 million. This prohibited individuals from making further non-concessional contributions if they had a super balance of more than $1.6 million.  

The origins of the $1.6 million figure are not clear, but are most likely double the assets test cut-off point for a pensioner couple – a sum that would provide an indexed income of $80,000 a year for 25 years if that fund earned a very conservative 4% return per annum. That income was approximately four times the single pension, and assumed that all capital would be expended after 25 years.  

Now, thanks to indexation, the transfer balance cap was increased to $1.7 million on 1 July 2021. If you have already used your $1.6 million cap, you will be unaffected by the indexation changes. If you have transferred only a portion of your transfer balance cap, you will be entitled to a proportional increase to the cap based on the unused portion. The calculation is a little complicated, but your financial advisor or your fund can provide further advice.  

The transfer balance cap is not well understood. Many people are under the false impression that it is the maximum you are allowed to hold in the tax-free pension fund. It is actually the maximum amount an individual may transfer from accumulation phase to pension phase (also known as retirement phase) in their lifetime. When you have transferred up to your cap, you are not allowed to transfer any new funds into pension phase, but the money you hold in this phase can continue to grow.  

Once you have transferred to pension phase, you are required to make minimum pension payments each year and these increase with age. The amount in your pension fund can grow if you make withdrawals at the minimum rate and your fund earns a higher rate.  

For the current financial year, a person aged between 65 and 74 must withdraw at least 2.5% of their balance. If their fund is returning an average of 7% per annum – and a good fund should be doing better than that – the amount in pension mode will keep growing.  

If you have funds remaining in accumulation phase after transferring up to your transfer balance cap into pension phase, income tax on these funds will continue to be a flat 15%. If you have funds in both pension phase and accumulation phase, any increase in the overall fund value will be applied proportionately to both, unless you have a segregated fund, which is unusual. 

If you have money in both phases, and need to make a lump sum withdrawal, you should take advice about which one to take it from.  

In most cases you are better off to withdraw it from the accumulation fund, as lump sum withdrawals from a pension fund can affect your cap. Yes, it’s complicated – which is why seeking advice before you act is the smart thing to do.

About the author 

Noel Whittaker is one of Australia’s foremost authorities on personal finance, providing advice to over 7 million readers each week in his weekly columns in major Australian newspapers including The Sydney Morning Herald, Melbourne’s The Age, Perth’s The Sunday Times, and Brisbane’s The Sunday Times. He has penned 22 best-selling personal finance books including Retirement Made Simple. Find out more on Noel’s website.  

Join us for our free webinar: Is the pension fair?

Have your say on the pension in our pre-election forum as we discuss Age Pension topics including: 

  • What are the main benefits and problems with our current pension system? 
  • What are the costs and benefits of moving to a universal pension? 
  • Should we have an Independent Pension Tribunal to set pension rates? 

Hear from expert panellists including Dr. David Knox, Dr. Deborah Ralston, Noel Whittaker and National Seniors Chief Advocate, Ian Henschke. 

Join us on Wednesday, 8 December: 

  • Queensland – 2:30pm AEST 

  • New South Wales, Australian Capital Territory, Victoria and Tasmania – 3:30pm AEDT 

  • South Australia – 3:00pm ACDT 

  • Northern Territory – 2:00pm ACST 

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A webinar is a video presentation hosted live online, often with tools for the audience to ask questions and comment. If you have any questions, you’re welcome to contact our Membership Call Centre team on 1300 76 50 50.