Q: I am interested in the apparent loophole that allows a pension fund to go above the applicable cap. In my case $1.7 million. On the ATO website it states that if your Total Super Balance on 30 June, the previous year is less than $1.48 million then non-concessional contributions for the first year can be $330,000. Thus, effectively making your new total super balance $1.81 million i.e. greater than the $1.7m cap. Can you explain any pitfalls in using this strategy to maximise funds in pension phase?
A: Remember, there’s a key difference between what we call our total super balance and what is referred to as our transfer balance cap. Although you refer to it as a loophole, it’s not really a loophole. It’s just the way that the legislations interact with each other.
It is the confusing terminology which is used. Let’s look at these. Remember that our total super balance refers to all balances held in all our super funds. Whether it be in accumulation phase or pension phase, it’s a balance representing everything that you have inside superannuation. It’s used to determine your eligibility to make contributions. It’s used to determine your eligibility to make use of the three-year non-concessional contribution. It’s there to determine your eligibility for the unused concessional contribution rules. The total balance is a measure that looks at your eligibility to do other things, to make contributions, etc.
That’s different to your transfer balance cap. That’s the limit you’re referred to about moving money into pension phase, into that tax-free retirement phase. Now, the transfer balance cap only limits what we can use to start, to commence a pension.
Once we’ve started a pension, those pensions can grow. They can increase in value, and sometimes well above that transfer balance cap. Currently, the $1.9 million, it’s grown from the $1.7 million to the $1.9 million. In some cases, you’ll see pensions which have balances well above that. If we go back to your specific query, which it says on the ATO website, it says that if your total super balance is below a certain level, you can put in contributions.
We’re looking here at your eligibility to make contributions is based on your total super balance. The transfer balance cap is the limit imposed on what we then move from contribution phase, from accumulation phase, into retirement phase. That’s the limit we spoke about of the current $1.9 million. But again, the limit is imposed on what we can move into pension phase. Those pensions can grow.
If we summarise that or look at that in a different way, there aren’t any real limits imposed on the total balances that can be held in your super savings. That total super balance restriction is on putting money if you have maximised your contributions, you can’t put more money in because of the total balance, it doesn’t stop you from then having growth in your balances.
In fact, in 2022, it was reported that the largest balance held in the self-managed fund was above $540 million. It doesn’t restrict your balances. It’s restricting you from doing certain things. We then looked at the limits imposed on moving balances into retirement phase, which we looked at around the transfer balance cap. That currently sits anywhere between that $1.6 million and $1.9 million.
Now, again, keep in mind that from 1 July 2025, we’ve got that change, that division 296 coming in, which is going to apply tax a bit differently if you’ve got more than $3 million inside super. It just applies an additional 15% tax on earnings relevant to your balances above $3 million.
I want to be clear here that the ATO’s comments aren’t necessarily a loophole, but what they’re saying is if you’ve got close to those limits, you need to think about how much you can put into superannuation. But once that money is in your pension, once you’ve moved money from the accumulation phase into pension phase, those pension balances can grow and grow and grow, and they can grow well above the transfer balance account balance. They can go well above that $1.9 million. Earnings and losses on a pension don’t affect your transfer balance account.
The transfer balance cap only limits what you can move or commence a pension with. Again, it’s not really a loophole. It’s just the way that the legislation works and those different terminologies need to be applied.
Have a look at those three articles on the page there around transfer balance cap, total balance, and then the difference between the two of them. There are three separate articles which will certainly help you with that particular topic. I hope that helps. It is a bit confusing, but to summarise that, there’s no real loophole. It’s the way you’re looking at what you’re doing, making a contribution versus then moving money into pension phase. Again, I hope that helped.
