What’s the transfer balance cap about – I’m retiring

Many Australian’s like Michael and Jenny (husband and wife) have used their superannuation to save for their retirement and they’re looking forward to the day when they permanently retire. They want to spend more time with the grandkids and take that European holiday.

Michael however has a superannuation balance over $1.6 million. This means he will be impacted by the transfer balance cap.

What does the transfer balance cap mean?

New rules around super (starting July 2017) mean that Michael can transfer $1.6 million into a retirement pension to enjoy the benefit of a 0% tax on the investment earnings.

That’s great news.

But what’s not great news is that there are penalties if you exceed the $1.6 million and Michael will need to make a decision about what to do, given his super balance is more than this. This also applies to Michael’s older sister Pamela who retired before 1 July 2017. She also had more than $1.6 million in super after selling her business and turned her super into a pension.

Michael and Pamela both can:

  • Keep some of the money in super. In Pamela’s case she can move some of her balance out of her pension and move it back to an accumulation account within super and pay up to 15% on the earnings within the fund.
  • Take a lump sum withdrawal to keep the transfer balance cap of $1.6 million without paying the penalty.
  • Or pay the excess transfer balance cap, which is the penalty for going over the $1.6 million cap.

I have a defined benefit account – does the transfer balance cap apply?

In the above example, both Michael and Pamela had accumulation accounts, but some workers like government employees, executives and defence force personnel have defined benefit accounts which pay them an income stream at retirement.

The transfer balance cap of $1.6 million applies to defined benefit accounts. It is worked about by multiplying the annual payment you receive by 16. If that amount is more than $1.6 million, you’re going to have the same issue as Michael and Pamela in the example above.

Lifetime annuities and certain life expectancy market linked pensions are also affected. It’s also important to consider estate planning issues too.

So what should Michael and Pamela do?

We’d say to Michael and Pamela, the same thing we’d say to you. Call Envision Financial Services and make an appointment to meet with Luke Smith our Financial Planner.

With the correct structures and investments in place there are strategies available that could allow Michael and Pamela to ensure that the accumulation account created as a result of the transfer balance cap remains tax free.

When you’re considering retirement, it is really important to understand all of your options. What might work for one person may not work for another as everyone’s financial situation is different. It’s also important to think about your retirement goals too. What do you want to do with your life after work?

Luke Smith works with many retirees to help them understand the transfer balance cap issues within their own retirement plan. The first appointment is typically at our cost. Envision Financial Services telephone number is 6260 4749.

General Advice (Tax) Warning

The information within is general advice only, prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to products mentioned before making any decisions. Any tax advice provided within is general advice only and you should consult with a tax professional before any decisions are made.

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