From 1 July 2021, the general Transfer Balance Cap (“TBC”) which limits the amount that can be transferred into the tax-free retirement phase of superannuation will be indexed to $1.7m (previously capped at $1.6m).
Recap – what is a transfer balance cap?
- Since 1 July 2017 there has been a cap of $1.6m that an individual can transfer into pension phase and any excess amount maintained in an accumulation account (where earnings are taxed at 15%)
- It applies to retirement phase income streams like Account Based Pensions and death benefit pensions (ie. upon the death of a spouse) and does not apply to Transition to Retirement Pensions unless they are a Retirement Phase Transition to Retirement Pension
- Depending on the member’s balance as at 30 June of the previous year and their NCC history, they may be restricted in the amount of NCC that can be contributed eg. no NCCs will be permitted for the member once their super balance exceeds $1.6m (or $1.7m from 1 July 2021)
- The general TBC is indexed to the Consumer Price Index in increments of $100,000
So what happens on 1 July 2021?
As the general TBC increases to $1.7m, gone will be the days of there being just the single cap applying to everyone. Each individual will now have their own individual TBC somewhere between $1.6m and $1.7m.
If you have never had a retirement phase pension or received a death benefit pension prior to 1 July 2021, then your TBC will be $1.7m.
Where you have previously commenced a retirement phase pension or received a death benefit pension prior to 1 July 2021, this would have been recorded by the ATO against your Transfer Balance Account (“TBA”). If your TBA has been:
- $1.6m or more between 1 July 2017 and 30 June 2021, your TBC will remain at $1.6m. You will not receive the benefit of the indexation as you have previously maximised your cap;
- less than $1.6m between 1 July 2017 and 30 June 2021, then you will benefit from partial indexation to your TBC. This increment in your TBC will be calculated based on the highest balance of your TBA.
Reminder: it does not matter if your total pension balance as at 30 June 2021 falls below $1.6m because it’s your TBA that matters.
Example 1 – starting a TBA on or after 1 July 2021
Tom turns 65 on 1 July 2021 and has an accumulation balance of $1.8m in his SMSF, of which he wants to commence an Account Based Pension (“ABP”).
As this is Tom’s first retirement phase income stream, his personal TBC will be $1.7m and this will be the maximum value that can be used to start his ABP. The remaining $100,000 will remain in accumulation phase.
Example 2 – existing TBA on or before 30 June 2021 with unchanged $1.6m TBC
Brady is now aged 68 and commenced an ABP from his SMSF on 1 January 2018 with his accumulation balance totalling $1.6m. He has been withdrawing in excess of his minimum pension payments each year in the form of lump sum commutations. As at 30 June 2021, his TBA is $1.2m.
Brady won’t be entitled to proportional indexation of his personal TBC because he had previously maximised his cap. He can however still commence a new retirement phase income stream to the value of $400,000 as his personal TBC remains at $1.6m.
Example 3 – existing TBA on or before 30 June 2021 with pro-rata increment of TBC
Gisele commenced an ABP when she turned 65 on 1 October 2020 with an amount of $1.3m and has had no other transfer balance events prior to 1 July 2021. Her unused cap amount of $300,000 as a percentage of her $1.6m TBC at 30 June 2021 is 18.75%.
So on 1 July 2021, the TBC would be indexed by 18.75% of $100,000 which is $18,750. This means Gisele’s TBC after indexation of the general TBC on 1 July 2021 will be $1,618,750.
Does this indexed TBC affect how much I can contribute?
As the general TBC equals the Total Superannuation Balance (“TSB”), then the TSB will also increase to $1.7m on 1 July 2021.
Depending on an individual’s TSB as at 30 June year, this will determine the ability to make non-concessional contributions the following year. So, if on 30 June 2021 an individual’s TSB is less than $1.7m, they can make non-concessional contributions from 1 July 2021. (Note: additional criteria need to be met if the member is aged 65 or older).
The actual contribution caps (concessional and non-concessional) do not change from 1 July 2021, only the TSB does.
Should you wish to clarify any of the rules surrounding TBC don’t hesitate to contact your client manager.
Kreston Stanley Williamson Team
*Correct as of February 2021
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.