The retirement phase, which has no tax on earnings, generally refers to the money you have in an income account as a Retirement Member, or an account-based pension.
The limit is called the transfer balance cap, and it came into effect on 1 July 2017. Its aim is to limit the use of super as a vehicle for tax minimisation or estate planning.
How does the transfer balance cap work?
When introduced in 2017, the transfer balance cap was set at $1.6 million for all Australians and applied retrospectively.
On 1 July 2023, the general transfer balance cap was indexed to $1.9 million in line with the consumer price index.
The indexation means that there’s now no single cap that applies to all individuals. Instead, the Australian Taxation Office (ATO) explains that each individual has their own personal transfer balance cap between $1.6 – 1.9 million, depending on their circumstances.
What is my cap?
If you open an income account as a Retirement Member for the first time on or after 1 July 2023, the general transfer balance cap of $1.9 million will apply.
However, if you already have what’s called a transfer balance account, your cap will work a little differently. You can view your personal transfer balance cap information in your ATO account via myGov.
It’s important to note that the indexation of the transfer balance cap may also change other contribution caps and limits that apply to you. You can learn more about this via the ATO.
What's a transfer balance account?
Your transfer balance account is a record of events or transactions that count towards your personal transfer balance cap. These events can either reduce or increase your available cap space.
For example, if you previously transferred $50,000 into an income account, drew down this money over a year through regular pension payments, and then closed this income account, your transfer balance account would record this and count the initial transfer towards your transfer balance cap. That means your cap would be reduced by $50,000, even though you drew down those funds.
If you already had money in the retirement phase before the introduction of the cap on 1 July 2017, this will also be recorded in your transfer balance account.
On the other hand, if you commute part of the balance of your income account – that is, withdraw money as a lump sum, either in cash or by transferring it back to an accumulation account – your available space under the transfer balance cap will increase again in line with the amount you withdrew.
However, it’s important to note that a regular pension payment you choose to take as a lump sum (for example, if you choose to have one yearly pension payment) is not a commutation.
What happens if you go over the cap?
There are a couple of things you can do if you go over your transfer balance cap. You can:
- commute the excess amount from the retirement phase; or
- pay tax on the notional earnings related to that excess
Do investment earnings in the retirement phase count towards the cap?
No, investment earnings do not count towards your cap. For example, if you transfer $1.9 million from your super account to an income account as a Retirement Member for the first time, and then this grows to $2 million through investment earnings, this growth will not be affected by the transfer balance cap.
If I have an income account as a Transition to Retirement member, does this count towards the cap?
No. This is because an income account as a Transition to Retirement member is not in the ‘retirement phase’ – investment earnings in this type of account are taxed at 15%, like a super account. In turn, any funds you transfer from your super account into an income account as a Transition to Retirement member will not be counted towards your cap.
However, an income account as a Transition to Retirement member will automatically move to the retirement phase if you still hold this type of account when you turn 65. If this happens, you are effectively transferring money into the retirement phase, and the balance you have in this account will then count towards your cap.