Q: Could you please explain what the Superannuation Transfer Balance Cap is and how this applies to my Retirement Income Stream?
A: The transfer balance cap is a lifetime limit on the amount a person can move from a superannuation fund to a tax free retirement phase income stream. Examples of retirement income streams include Allocated Pensions and Annuities.
Australian income streams in retirement phase count towards the transfer balance cap. However transition to retirement income streams or pensions received from foreign super funds are exempt.
The general transfer balance cap is currently $1.6 million however this limit will be indexed to $1.7 million on 1 July 2021. However the full $100,000 increase in limit is generally only available to individuals who have never commenced a retirement phase income stream before 1 July 2021.
Exceptions to this include child recipients of a death benefit pension and those who have commenced a pension sourced from contributions of structured settlement/personal injury compensation payments where these amounts do not count towards the transfer balance cap.
If you are currently in receipt of a tax free retirement income stream, you will have you have a transfer balance account registered with the ATO that tracks all your retirement income streams and your personal transfer balance cap.
Your entitlement to an increase in your personal transfer balance cap will only apply to your unused portion of your transfer balance cap.
Here is an example of how the changes will apply.
If you had commenced a retirement phase Allocated Pension of $1.2 million on 1 July 2018, you have used 75% of your Transfer Balance Cap of $1.6 million. Accordingly $400,000 or 25% of your transfer balance cap is unused and this entitlement is registered in your personal transfer balance account.
When the general transfer balance cap indexes by $100,000 on 1 July 2021, your personal balance cap will increase by the unused 25% portion; i.e. 25% or $25,000. As such, your personal transfer balance cap will become $1,625,000. You will then be able to move another $425,000 to a tax-exempt retirement phase pension from 1 July 2021.
Each time the ATO indexes the general transfer balance cap, the only portion of you personal transfer balance cap that will be indexed is the unused portion. You can monitor your transfer balance account via your ATO online account.
It is important to understand that what counts against your personal transfer balance cap is the transfers in or out of retirement phase. Growth of your retirement income stream balance will not trigger a breach of the cap.
If you trigger a breach to your personal transfer balance cap, you may have to commute/transfer the excess portion of your retirement phase income stream into a lump sum and pay tax on the notional earnings related to that excess.
Whilst unfamiliar and new, Superannuation transfer balance caps are complex but really important to understand. Consult your financial adviser.
Q: I am looking to retire in April this year and commence a retirement income stream. Should I wait until after 1 July to take advantage of the increase in the Superannuation General Transfer balance cap?
A: If you have a large super balance in excess of the current $1.6 million cap, then it may be better to wait until July 1 to take advantage of the increase in the Superannuation general transfer cap to $1.7 million.
Even if your Superannuation balance is well below the general transfer cap, commencing a retirement phase income stream now may not be the best solution as it would lock in the lower cap forever. Delaying the start until the new financial year will mean your personal transfer balance cap will start at $1.7 million. As a result, any unused portion of your unused transfer balance cap will be higher providing flexibility for future use.
Delaying the commencement of your retirement income stream needs to be weighed against the benefits of starting a retirement phase income streams as soon as possible. For example, if you were about to trigger a large capital gain inside your Superannuation fund this financial year, you may choose to transfer to pension mode now to take advantage of the tax free status of retirement phase income streams prior to triggering the capital gain.
Those in a transition to retirement income stream turning 65 prior to 1 July 2021 need to be careful. Attaining age 65 automatically triggers a change from a transition to retirement income stream to a retirement phase income stream and hence assessment against the Superannuation general transfer cap. If you wish to take advantage of the higher general transfer cap, you will need to commute your income stream back to Superannuation accumulation mode prior to turning age 65 and then commence a retirement phase income stream after 1 July.