Superannuation Shake-Up: How Inflation is Raising Contribution and Pension Caps— by Noel Whittaker
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Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [email protected]
Inflation may be the enemy, but it does one good thing for superannuation – it lifts the limits.
From 1 July, you will be able to make non-concessional contributions if your fund balance is under $2 million – up from today’s $1.9 million.
The other increase is to the Transfer Balance Cap (TBC) which also rises to $2 million on 1 July.
The TBC was introduced on 1 July 2017 as part of the government’s superannuation reforms to limit the amount an individual can transfer into a tax-free retirement phase pension within their superannuation. The TBC is indexed in line with the consumer price index (CPI) and was therefore increased to $1.7 million on 1 July 2021 and $1.9 million on 1 July 2023. However, indexation is applied proportionally, meaning that individuals with existing pension accounts receive only a portion of the increase.
Your transfer balance cap is a lifetime limit on the amount you can transfer into one or more retirement phase accounts. Image Credit: Shutterstock
When the TBC was introduced, many superannuants moved $1.6 million (the then limit) into pension mode. For them, the TBC remains unchanged – but there's no limit on how much their pension fund can grow. For instance, someone aged 65–74 with $1.6 million in a super fund earning 9% and drawing the minimum 5% pension could see their tax-free balance rise to $1.664 million.
There is complexity for three groups: those yet to start their pension; those who haven't used their full TBC; and those who have a transition-to-retirement (TTR) pension that will meet a full condition of release before 30 June.
Those who are yet to start drawing a pension need advice. A $1.9 million transfer now gives an extra five months tax-free earnings, which could be substantial if the fund performs well, and is almost a no-brainer if a big, taxable capital gain is expected before 30 June.
I’m receiving many inquiries from people who have used part of their TBC and are receiving additional lump sums from an inheritance or asset sale. Most are under the wrong impression that by waiting until July they become eligible for the entire $2 million TBC. But it’s actually a complicated formula.
CASE STUDY: Jack started a pension with $1 million in January 2018, which meant he had used $1 million of his TBC. Through myGov, he discovers that his current personal TBC is $1.714 million. This means he can transfer an additional $714,000 into pension mode before 30 June. However, if he does so, he will forfeit the opportunity to access any future indexation. If he waits until after 30 June, his increased cap will be $752,000 – that’s an additional $38,000. He will need to seek professional advice to determine the best course of action for his individual circumstances.
It’s even more complex for those currently drawing a (TTR) pension.
A TTR pension is not in the retirement phase and is not assessed against the TBC until a full condition of release is met. This happens automatically at age 65 or when the trustee is notified that a condition of release has been satisfied.
It’s crucial for individuals in this situation to review their circumstances before their 65th birthday. For example, if their TTR balance exceeds their available TBC space, they may need to roll the TTR back into accumulation mode to avoid exceeding the cap.
As always, professional advice is essential in navigating these decisions.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Always seek professional advice that takes into account your personal circumstances before making any financial decisions. The views expressed in this publication are those of the author.
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