On 1 July 2023, the Transfer Balance Cap is set to increase from $1.7m to $1.9m. These changes may affect the superannuation strategy you currently have in place.
Our financial advisory team at Liston Newton Advisory is here to help you plan for your future. Get in touch with us to discuss how these changes affect your superannuation.
The Transfer Balance Cap explained
During the accumulation phase of your super, that is, during your working life, your superannuation gets taxed at 15% on its earnings. When you transfer into retirement—your pension phase—all your earnings are tax-free.
When you retire, you can choose to access your superannuation either as a lump sum, an income stream, or a combination of both these measures. The Transfer Balance Cap (TBC) puts a lifetime limit on the amount of money you can transfer into a retirement income stream.
It gets calculated, or indexed, at the time you transfer funds into your pension phase. This figure is the amount that counts towards the TBC, regardless of any fluctuations on the market value of your pension balance.
That limit currently sites at $1.7 million per individual. From 1 July 2023, this will increase to $1.9 million per individual.
What the Transfer Balance Cap increase means
Unfortunately, this increase to the TBC may not benefit everyone.
If you haven’t started a pension
Those who haven’t started their pension at the changeover date are entitled to receive the full benefit from this increase.
If you’ve already used the full TBC
Those who have already fully utilised their TBC won’t benefit in any way, shape, or form. They’re still considered to have reached their TBC.
If you’ve only used part of your TBC
The complexity starts for those individuals in between, who have only used a portion of their TBC. They’re entitled to a proportional increase only.
The remaining unused TBC available to them will be calculated as a percentage of their original cap. The $200k increase will be multiplied by this percentage amount. The resulting dollar figure is added to their original TBC as the amount they can now access.
Example
Peter started a pension in 2022 with $1,275,000, with an original TBC of $1.7 million. This means he has $425,000 remaining towards his TBC, or 25%.
When the new $1.9 million cap comes into effect, he calculates 25% of the $200,000 increase, and adds this figure to his total TBC.
This means his new TBC is $1.75 million, and he has $475,000 remaining.
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Other effects on superannuation
This increase in TBC will impact other superannuation measures, too.
Non-Concessional Contributions
For example, the TBC dictates the amount of Non-Concessional Contributions (NCC) an individual can make in any year.
The current NCC yearly limit is $110,000. Under the Bring Forward Rule, you can bring forward the next two years of NCCs to this financial year. This effectively lets you contribute $330,000 in one year.
Currently, once an individual reaches a TBC threshold of $1.48m they can’t use the Bring Forward Rule anymore, as contributing an extra $110,000 (on top of their existing $110,000 limit) will breach the $1.7 million TBC.
But the new TBC raises this threshold to $1.68 million. This means that people who have already reached the existing $1.48 million threshold maybe be able to make NCCs in future years.
Deciding when to start your retirement
If you’ve been thinking about starting you pension phase now, you may want to reconsider. By waiting just a few months, and commencing your pension on or after the 1 July 2023, this allows you to take full advantage of the TBC increase.
Furthermore, those who currently have a Transition to Retirement Pension may want to make sure this doesn’t inadvertently convert into a Full Account Based Pension before the new TBC date comes into effect.
Get peace of mind that your super strategy is secure
Undoubtedly, these changes will bring further complexity to a superannuation system that’s already complex enough to navigate.
That’s why it pays to have the right advice to help guide you. Not only to make sure you’re adhering with current legislation, but also to maximise the potential benefits that the new superannuation system may have to offer.
