How lump sums can reduce your transfer balance account

Once again, it is the paperwork in place at the time that will determine how payments will be treated. We will look at the paperwork expectations shortly.

How payments affect the transfer balance cap (TBC)

The next fundamental we need to look at is the transfer balance cap, a lifetime limit imposed on the superannuation savings you can move into retirement (or pension) phase. It is in this phase the fund earnings on its assets are tax free.

This limit was originally set at $1.6 million but was then indexed to $1.7 million on 1 July 2021. Further indexation on 1 July 2023 took the transfer balance cap to the current level of $1.9 million. 

To track how much of the transfer balance cap you have already used, you are given a transfer balance account (TBA) that records events that are relevant to the cap, such as starting or stopping a pension.

This is where things get interesting, as not all fund events affect the calculation of your personal transfer balance account. Events that do affect the calculation of your TBA include:

• Starting a pension
• Ceasing a pension
• Lump sums that are accessed from a pension account.

Lump sums taken from a pension account are subtracted from your transfer balance account, allowing more money to be moved into retirement phase later.

Events that do not affect the calculation of your TBA include:

• Pension payments
• Fund earnings.

You can view the balance of your transfer balance account by contacting the ATO or through MyGov.

Now let’s look at an example of how the decision to withdraw retirement savings as a pension payment or lump sum can affect your transfer balance account.

Lump sum option

The following shows a 12-month snapshot of Gavan’s transfer balance account, if he were to access a $50,000 lump sum.

As the additional payment was treated as a lump sum, the $50,000 amount is subtracted from Gavan’s transfer balance account, and he could now move a further $50,000 into retirement phase if he has the money and chooses to do so, because there is $50,000 of space between the value of his transfer balance account and his transfer balance cap.

Increased pension option

If Gavan instead chooses to increase each monthly pension payment, his transfer balance account will not be affected:

* The following six pension payments would remain at $10,500 and then revert to the minimum pension amount.

In this scenario, the additional $50,000 is accessed by increasing the following 12 monthly pension payments, so there’s no effect on Gavan’s transfer balance account.

Under both scenarios, the super fund pays Gavan the same amount of money. However, electing for a lump sum payment creates an opportunity for Gavan to move other money into the tax-free retirement phase if he wants to.

Let’s jump ahead two years. Gavan and Gabby are now settled into the retirement lifestyle after their recent travels.

They recently received an inheritance of $40,000 each from a late uncle and they both decide to contribute this to their respective super funds.

If Gavan accessed the original $50,000 travel money by way of increased pension payments, he would have no way of moving this new $40,000 into a pension. Gavan has already used his entire transfer balance cap when he first started his $1.9 million pension. The $40,000 that was recently contributed to super would remain in accumulation phase and the fund would pay 15% tax on earnings the $40,000 generates.

However, if Gavan accessed the original $50,000 travel money as a lump sum from his pension, he can use the $40,000 he recently contributed to commence a new pension where all the earnings would become tax free again.

Process and procedures

As mentioned earlier, it’s the paperwork at the time of the event that is most important.

Most public super funds would have a standard form to use when commencing a pension or accessing a lump sum. Always check with the relevant fund.

Where an SMSF is already paying a pension, the required documentation needs to be in place prior to any payment being made, namely:

• A member request for a pension to start. The request would often include:
  • The start balance for the pension (the purchase price of the pension)
  • The frequency of each pension payment
  • The amount of each pension payment or a method to calculate the amount
  • (In some cases) a request that the trustees treat all payments above the minimum pension required as lump sum payments, with separate documentation for these.
• A trustee resolution (minute) to action the above

Then, if there is a lump sum being taken from the SMSF, the following documentation needs to be in place prior to any payment being made:

• A member request for a lump sum payment, including the lump sum amount and from which account it should be paid (the member’s pension account or accumulation account). This article has focussed on accessing a lump sum from an existing pension account.
• A trustee resolution (minute) to action the above.

Final comments

Keep this in mind if you ever need to access money from your super that is more than you are required to take each year (the minimum pension). Consider taking a lump sum if appropriate.

Remember that your financial position can change over time with inheritances, proceeds from downsizing your home, or the sale of other assets during retirement, so further contributions to super may be something you look at in the future. With changes to super that now allow you to make non-concessional (after-tax) contributions later in life, this is an area that affects even more Australians.