By Graeme Colley
For anyone who had a pension in place on 1 July 2017 when the super changes commenced or started one after that time the value of the pension is counted against their Transfer Balance Cap (TBC). Most people who are currently in receipt of a pension have a TBC of $1.6 million but a small number in receipt of defined benefit pensions, such as life expectancy or lifetime pensions may have a higher TBC. This article is about those who have a TBC of $1.6 million.
A person’s TBC restricts the amount that can be transferred into pension phase so that any income on investments supporting the pension remains tax exempt. Any change in the balance of the pension due to pension payments or fluctuation in the balance due to the value of the underlying investments do not impact on the amount counted for a person’s TBC. However, converting some or all of the pension to a lump sum (commutation) will reduce the amount counted against the person’s TBC.
The TBC is not to be confused with a person’s Total Superannuation Balance (TSB) which is calculated on the total amount a person has in all superannuation funds as at 30 June in the previous financial year. The TSB determines whether non-concessional contributions can be accepted by the fund and whether a person qualifies for other types of contribution concessions such as the co-contribution or bring forward concessional contributions. For example, a person with a TSB greater than $1.6 million will be penalised if they make non-concessional contributions to the fund.
Since 1 July 2017 the TBC has been $1.6 million but is to be indexed from 1 July 2021 as permitted by the tax legislation. Indexation is based on changes in the Consumer Price Index and any change in the cap takes place in increments of $100,000. Thus the increase to $1.7 million.
The main issue with the indexation of the TBC is that anyone who has already used up the whole of the $1.6 million cap will not get access to the increased amount. However, anyone who has not used up all of their $1.6 million cap will be entitled to a proportional increase in the indexed amount. Anyone who has not commenced a pension from their super fund will have the opportunity of the increased TBC amount of $1.7 million. If that sounds confusing then here are a few case studies to show you how it works:
Let’s assume someone was receiving an account based pension from their super fund which had a balance of $1 million on 1 July 2017 when the new rules commenced. At that time the balance would have been counted as a credit against their TBC. On 1 July 2020 they commenced another account based pension with $600,000 which is also credited to their TBC. As the total amount counted against their TBC is $1.6 million they have used up all of their cap and won’t get access to the $1.7 million indexed threshold.
In this case study a person commenced a pension on 1 September 2019 with $1.2 million and has not commenced another pension since. With the increase in the TBC on 1 July 2021 the person will get a proportional increase in their TBC. As they have used up 75% of their TBC then they will be entitled to 25% of the increase in the TBC due to indexation. This means that their TBC will increase by $25,000 (25% of $100,000) to $1,625,000 in view of the unused proportion of the TBC they have not used.
This case study covers someone aged 60 who plans to commence their first pension from their super fund on 31 December 2021. As they haven’t used any of their TBC they will be entitled to the whole of the indexed cap of $1.7 million.
As you can see from the above case studies whether someone is entitled to a higher TBC due to indexation depends on the proportion of the cap that has been used previously. Anyone who is yet to commence a pension may get access to the full indexed cap amount but anyone who had a pension in place since 1 July 2017 may only get access to a proportion of the indexed amount.