Superannuation Transfer Balance Cap Explained [2023]

Once-upon-a-time in the days of simple pleasures and pre-lock downs you, in your God-given right as a retiree, were able to transfer as much of your super as you damn-well pleased from your accumulation account into an account-based pension.

That is, until some genius in Canberra created the Transfer Balance Cap.

What is the Transfer Balance Cap?

The Transfer Balance Cap is a limit on the amount of your superannuation balance that you are able to transfer into a pension account to start an income stream.

Each individual has their own personal Transfer Balance Cap.

This article explains how the Transfer Balance Cap works, what the Transfer Balance Cap is and any penalties applied to exceeding the Transfer Balance Cap.

What is the Transfer Balance Cap in 2024?

The Transfer Balance Cap is $1.9 million for the 2023 / 2024 financial year. This represents the maximum amount you can use to commence an account based pension.

Why is there a Transfer Balance Cap?

The reason for the Transfer Balance Cap is to limit the amount of superannuation you can use to start a pension.

You see, the benefit of investing within a super accumulation account is that all tax on super earnings is at a maximum of 15%, compared to up to 45% if you were to invest in your individual name, instead.

But it gets even better.

Once you use your super to start an account-based pension, all investment earnings (including realised capital gains) are received completely tax free.

Therefore, prior to the introduction of the Transfer Balance Cap, you could transfer a super balance of, say, $4 million into pension phase and receive tax-free earnings on the total amount.

The Transfer Balance Cap now restricts the amount you can transfer into pension phase up to a maximum of $1.9 million.

What If My Super Balance Exceeds the Transfer Balance Cap?

It’s okay if your superannuation balance exceeds the Transfer Balance Cap. The Transfer Balance Cap only restricts the amount that you can use to start an income stream. Any excess amount above the $1.9 million can either be withdrawn out of superannuation (be mindful of tax on super withdrawals), if eligible, or remain invested in superannuation accumulation phase.

You are not penalised for having a superannuation accumulation balance in excess of the Transfer Balance Cap.

Should you exceed your Transfer Balance Cap by using more than the cap to commence one or more income streams, the excess amount, plus calculated notional earnings, will need to be transferred back into an accumulation account and you will be subject to Excess Transfer Balance Cap Tax. The Excess Transfer Balance Cap Tax rate is 15% on the notional earnings, so that any tax advantage gained by having too much in a pension account is neutralised. However, second and subsequent offences incur a 30% tax, which is effectively a 15% penalty tax.

How is the Transfer Balance Cap Calculated?

The calculation of the Transfer Balance Cap is calculated on a debits and credits system.

Basically, any amount used to start a pension will reduce the amount of Transfer Balance Cap you have remaining. Conversely, if you transfer some or all of your pension balance back to accumulation phase, your Transfer Balance Cap will increase by the amount rolled back (commuted) to accumulation phase.

To avoid confusion, any amount withdrawn directly from your pension account to your personal bank account will not increase the space available in your Transfer Balance Cap.

When there are indexation increases in the Transfer Balance Cap, you will be eligible to a proportional increase based on how much of the cap you have already used. For instance, if the cap increases by $100,000 and you have not used any part of the Transfer Balance Cap, then you will be entitled to the full increase, if you have used half of your cap, then you will be eligible for half ($50,000) of the increase, and so on.

What if My Pension Grows Above the Transfer Balance Cap?

It is okay if your pension balance grows above the Transfer Balance Cap as a result of investment earnings, provided the original amount transferred into your pension did not exceed your transfer balance cap.

If your pension balance does grow higher than the Transfer Balance Cap, you are not required to withdraw the surplus amount or transfer it back to accumulation phase. You are welcome to leave the total amount in the pension.

Transfer Balance Cap Example

Example 1 – Standard Pension Commencement

Let’s assume you commenced an account based pension on 1 July 2023 with $1,425,000, which is below the Transfer Balance Cap of $1,900,000. There would be a debit against your personal cap of $1,425,000. You would still have a further $475,000 available in the cap should you wish to transfer more into a pension in the future.

Start: Transfer Balance Cap Used: $0

Debit (transfer to Pension): $1,425,000

Transfer Balance Cap Used: $1,425,000

Transfer Balance Cap Available: $475,000

Example 2 – Negative Transfer Balance Cap

Let’s assume you commenced an account based pension on 1 July 2023 with $1,425,000, which is below the Transfer Balance Cap of $1,900,000. There would be a debit against your personal cap of $1,425,000. If your pension balance grew to $1,525,000 as a result of investment earnings, despite also taking pension payments, and you – for whatever reason – transferred your pension back to accumulation phase, you would have a Transfer Balance Cap of -$100,000. This is because the $1,525,000 would be a credit towards your used $1,425,000 as follows:

Start: Transfer Balance Cap Used: $0

Debit (transfer to Pension): $1,425,000

Credit (rollback to Accumulation): $1,525,000

Transfer Balance Cap Used: -$100,000

Transfer Balance Cap Remaining: $2,000,000

Example 3 – Indexation of Transfer Balance Cap

Let’s assume you commenced an account based pension on 1 July 2023 with $1,425,000. There would be a debit against your personal cap of $1,425,000. If, due to indexation, the Transfer Balance Cap increased to $2,000,000, you would be entitled to only 25% of the increase, because you have already used 75% of the cap, as follows:

Transfer Balance Cap Used: $0

Start: Debit (transfer to Pension): $1,425,000 (75% of $1.9M)

Increase in Transfer Balance Cap: $100,000

Increase Applied to Your Cap: $25,000 (25% of $100,000)

Transfer Balance Cap Remaining: $500,000 ($475,000 + $25,000)

Accessing Superannuation After Retirement: What Are Your Options?

How Often Is The Transfer Balance Cap Indexed?

The Transfer Balance Cap is designed to increase in line with the Consumer Price Index (CPI) in $100,000 increments. That is, it will remain at the current Transfer Balance Cap amount until the $1,900,000 multiplied by the CPI increases to at least $2,000,000, at which point the new Transfer Balance Cap will be $2,000,000.

Defined Benefit Pension Transfer Balance Cap

The defined benefit pension Transfer Balance Cap is $1,900,000 (or $118,750 per annum) for the 2023 / 2024 financial, but the portion of the defined benefit pension that is taxed will depend on whether your pension is from a taxed source or an untaxed source, as follows.

Defined Benefit Pension (taxed source)

If you have a defined benefit pension from a taxed source, you can receive an income up to $118,750 per annum tax-free once you have attained age 60. If you receive defined benefit pension income in excess of $118,750, 50% of the excess amount will be assessed at your individual tax rate for tax purposes.

Defined Benefit Pension (untaxed source)

If you have defined benefit pension from an untaxed source, the total income, regardless of the amount, will be assessed at your individual tax rate. However, you will receive a 10% tax offset up to $10,000 (if over 60) on the amount received.

Defined Benefit Pension and Account-Based Pension

If you have a defined benefit pension and an account-based pension, both will count towards the Transfer Balance Cap of $1,900,000.

To calculate how much of your defined benefit pension counts towards the Transfer Balance Cap, you multiply the annual defined benefit pension income by 16. The result is how much counts towards your used Transfer Balance Cap. For example, if the defined benefit pension you are receiving is $60,000 per year, then you will be utilising $960,000 of your $1,900,000 Transfer Balance Cap. This leaves you with up to $940,000 that can be used to commence an account based pension with any super accumulation balance you may have.

Any increases to your defined benefit pension payments after commencement as a result of indexation will not count towards the transfer balance cap. To be clear, only the original defined benefit income amount at commencement will count towards the transfer balance cap, using the multiple of 16 formula.

Any portion of your account-based pension balance that causes you to exceed the cap, needs to be rolled back into an accumulation account.

Transition to Retirement Pension Transfer Balance Cap

A Transition to Retirement Pension balance does not count towards the Transfer Balance Cap. The reason for this is because investment earnings within a Transition to Retirement Pension account are taxed identically to an accumulation account.

Transfer Balance Cap Strategies

Some Transfer Balance Cap strategies include timing when to start a pension and when to commute a pension back to an accumulation account, based on recent or expected economic and market movements that can result in an effective increase in your Transfer Balance Cap and the amount held within the tax-free pension phase. However, you need to be mindful that such strategies are employed for reasons other than receiving a tax advantage.

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