Important Note: The limits and caps are set to be indexed from 1 July 2021.
What is the Transfer Balance Cap?
There is a limit on the amount you can transfer from super (accumulation phase) to pension (retirement phase). This is called the Transfer Balance Cap which is currently $1.6 million and will be indexed each year in line with CPI in increments of $100,000. This limits how much money can be transferred to a tax-free income stream in retirement. It also significantly impacts death benefit payments by income stream.
Any amount over the Transfer Balance Cap will need to be retained in super or cashed out. If kept in super, the balance will still receive the concessional tax treatment as per a normal super fund.
How does it work?
When you commence a retirement phase income stream post 1 July 2017, the Transfer Balance Cap is $1.6 million. You will have your own transfer balance account that operates like a bank account. Credits and debits will occur in this personal transfer balance account as outlined in the table below. The account and associated debits and credits cease upon death. If the balance of the account exceeds the Transfer Balance Cap, an excess balance will be created.
Exceeding the Transfer Balance Cap
If you transfer more than your personal Transfer Balance Cap into a retirement phase income stream, an ‘excess transfer balance’ will be created and includes:
- The amount exceeding your personal Transfer Balance Cap.
- The notional earnings on the excess amount. Excess transfer balance tax will be payable on the notional earnings.
The ATO may issue an excess transfer balance determination to ‘crystallise’ the amount that needs to be withdrawn. This limits the notional earnings to this determination amount.
What do I do?
The excess needs to be withdrawn from the income stream and either rolled back to super or paid as a lump sum withdrawal to cash. The sooner you do this the better, as the excess balance tax will be calculated and applied daily until the excess is transferred out.
If a determination is issued, the withdrawal needs to occur within 60 days of its issue or the ATO will send an automatic withdrawal notification to the super fund. Your super fund will then be required to pay out the amount as per the ATO’s instructions.
Modifications for capped defined benefit income streams
If you have one retirement phase income stream and it is a capped defined benefit income stream, no excess will be created. You cannot commute part of it, so it stays in retirement phase.
If you have a capped defined benefit income stream and an account-based pension, the excess will be modified to allow for the defined portion. For example, if you have a capped defined benefit income stream credit on the account for $1.7 million and you receive a death benefit account based income stream for $250,000, your excess will be the $250,000 rather than the Transfer Balance Cap of $1.6 million. The defined benefit income stream will remain intact.
What are the exceptions to these general rules?
- Transitional Transfer Balance Cap: Where retirement phase income streams started between 1 July 2017 and 31 December 2017, the transitional Transfer Balance Cap was up to $1.7 million.
- Proportional indexation of your personal Transfer Balance Cap: If you start a retirement phase income stream that is less than the dollar value of Transfer Balance Cap, any future indexation of the Transfer Balance Cap will be applied proportionately to your account. This ensures that your remaining portion, up to the Transfer Balance Cap, keeps pace with inflation (CPI). For example, you commence an account-based pension with a value of $1.2 million. The unused portion is $400,000. The Transfer Balance Cap is indexed the following year to $1.7 million. The increase is applied proportionately to the $400,000 and now you still have $425,000 remaining.
- Capped defined benefit income streams: Modified rules apply to capped defined benefit income streams due to their non-commutable nature. The Transfer Balance Cap will represent either: a) The income stream payment multiplied by 16 for complying lifetime income streams, or b) The annual entitlement multiplied by the term remaining, for complying life expectancy or term allocated pensions. You should check with your super fund to see if your income stream meets the definition of a capped defined benefit income stream.
- Death benefit income streams for adults: Death benefit income streams paid to adult beneficiaries will create a transfer balance account for the beneficiary. The credit to this account is 12 months from the date of death if paid as a ‘reversionary’ income stream. Otherwise, the credit will be made to the beneficiaries account on the date of death. If an excess is created, it must be paid as a lump sum withdrawal to cash; it cannot be paid to super.
- Death benefit income streams for children: Death benefit payments can be made as an income stream to dependent children. The Transfer Balance Cap will be reflective of the deceased person’s account and will cease when the child turns 25 unless further disability provisions are met. If the child only receives a portion of the benefit, the Transfer Balance Cap will equal that portion only. If an excess is created, it must be paid as a lump sum withdrawal to cash; it cannot be paid into super.