Q&A: What happens if I start a pension and gains push the balance over the transfer balance cap?

Now, there’s a limit imposed on that now, and it’s called the Transfer Balance Cap. Initially, it was $1.6 million where we were restricted as to a limit imposed on what can be transferred into retirement phase. So as I said, initially, that limit was $1.6 million. It’s subject to indexation in $100,000 increments, and it’s recently got up to $1.7 million. That’s a limit which is imposed on the total amount that can be moved or transferred into retirement phase. Importantly, it’s not a limit imposed on the balances which can be held in retirement phase. It’s a limit imposed on what can be moved in to retirement phase.

So going back to your question, which is around, well, what happens if we have an asset which goes up considerably in value, if it’s a significant capital gain? That’s OK. So long as when we move that money into the retirement phase, we’re within the limits, the $1.6 or $1.7 million dollars limits, then the amount of money can grow. Our retirement phase balances, our pension balances can grow and it can go well above the $1.6 or $1.7 million dollars and it doesn’t create a problem. You do not have to move money back to accumulation. What you’re looking at is only the limits, the restrictions on what can be moved from accumulation to pension phase. After that, it can grow. And obviously, that’s what we want. We want that balance to grow as much as possible so it lasts as long as possible.

Again, often the confusion here is around what’s called the Total Super Balance, which is taking all our balances and all our funds and saying how much we have as a Total Super Balance. And that can affect things like contributions. It can affect things like government rebates. And that’s a different issue to the transfer balance cap, which is what I just mentioned.

So have a look at the article there on the right there. It was updated only about a month and a half ago. That takes you through the differences between the Total Super Balance and Transfer Balance Cap. On top of that, there’s another article around the transfer balance cap for pensions. And it focuses solely on what we’ve just been through, which was how much we can move in the pension and the balances going from there. I hope that helps.

Thanks, Garth. It might be worth mentioning as well that those increments in terms of the $100,000 increments, it’s possible that because of the inflation rises that we’ve had recently, that that might go up this coming July 2023, it’s possible that that could go up to $1.8 or even $1.9. Is it worth mentioning anything about how, if you’ve already made some transfer, something to your pension phase, but you haven’t made the full $1.7, that can get a bit complicated.

Yeah, it can, Rob. And look, this is one of the things that I… look, with all kudos to the government for the super changes. I think what we’re talking about here wasn’t done as easily as it could have been. So let’s look, for instance, at a person, Garth. Garth retired, and I’ll make it easy, 1 July 2021, and I moved $800,000 of my money from my left hand side here, my accumulation, to my retirement phase. At the time, the limit was $1.6 million. I moved $800,000 across.

So arguably, I’ve still got $800,000 worth of my transfer balance cap that I can move more money into pension phase if I have it. Now, a year later, the government indexed that $1.6 (million), so it became $1.7 (million). Now, you would think that, okay, it’s gone from $1.6 million transfer balance to $1.7 (million). I can now use the remainder, which is the $900,000, right? The $1.6 (million) less the $800,000 gives me $800,000 plus $100,000 indexation is $900,000. That’s not how it works, unfortunately.

The amount of the increase, the amount of the indexed $100,000 is also proportionate. So because I used $800,000 of my $1.6 million cap last year or last time, I only get half. So $800,000 over $1.6 million is half. I only get half the indexation, which is $50,000. So now my personal transfer balance cap will be $1.65 million, not $1.7 million.

And then if we have indexation going forward, again, it’s the same thing when you think about how much of the transfer balance cap has been used. Any indexation is proportionate. So in my example, I only get half the indexation. Complicated way of doing it, but that was the way that it was done and how we have to deal with it now.