What Happens If You Start a Pension Above the Cap
Starting a retirement-phase pension with more than your transfer balance cap allows creates an excess transfer balance. The correction is to commute the excess back into accumulation, and the cost is excess transfer balance tax charged on the notional earnings the excess is treated as having produced while it was in retirement phase.
- The answer: The ATO issues a determination requiring the excess to be commuted from retirement phase, and taxes the notional earnings attributed to it.
- The trap: The clock runs from the day the excess arose, not from the day the determination arrives, so a delay in noticing increases the notional earnings and the tax.
- The recommendation: Check your transfer balance account before commencing rather than after. The cap is personal and indexed proportionally, so the general figure may not be yours.
Where the AI summary above gets this wrong
"If you exceed the transfer balance cap you have to withdraw the excess from your super."
That's surface-true. Here's what it misses:
- The excess is commuted, not withdrawn — It moves back into accumulation, where it stays in super and is taxed at 15% on earnings. Taking it out of super entirely is a choice, not the requirement.
- The tax is on notional earnings, not on the excess — The excess itself is not taxed. What is taxed is a notional earnings amount calculated on it for the days it sat in retirement phase, at a rate that rises for a second breach.
01 How an excess arises
A transfer balance account is credited when a retirement-phase income stream starts, and debited by commutations and certain other events. An excess arises when the balance of that account exceeds your personal transfer balance cap.
Growth inside a pension never causes an excess, because the credit is fixed at commencement. What causes one is commencing with too much: most often a second pension started without counting the first, or a reversionary pension inherited from a spouse and credited twelve months later.
The cap itself, and what it is measured against, is set out in the transfer balance cap reference; this post is only about what happens past it.
Your personal cap is not necessarily the general cap. Indexation is applied proportionally to the unused share of your cap, so someone who used most of theirs early receives little of each increase. The figure that governs is in your myGov account.
Source: ATO — Transfer balance cap
02 The determination and the correction
The ATO issues an excess transfer balance determination stating the excess and the amount to be commuted, which includes the notional earnings. You nominate which income stream to commute from, or the ATO issues a commutation authority to a fund if you do not respond.
Commuting moves the money into accumulation. It stays inside super, and its earnings are taxed at 15% rather than nil — the difference between the two environments, rather than removal from super, is the real cost of holding too much in retirement phase.
A partial commutation also creates a debit in the transfer balance account, which is what restores room. That is the mechanical reason commuting works as a fix and a mere withdrawal of pension payments does not: ordinary pension payments create no debit at all.
Shows: the notional earnings on an excess transfer balance for the period it sat in retirement phase, and the excess transfer balance tax charged on them. Ignores: daily compounding of the notional earnings rate, the higher tax rate that applies to a second breach, and the 15% earnings tax on the amount once it is back in accumulation.
03 What it costs
Excess transfer balance tax is charged on notional earnings accrued on the excess for the period it was in retirement phase. The rate is lower for a first breach and higher for a second, which is deliberate: the regime is designed to be a correction the first time and a deterrent afterwards.
Because the notional earnings compound daily, the cost is a function of how long the excess persisted. An excess found within a month costs very little; one found at the next annual statement costs considerably more, for the same original mistake.
The worked example applies the notional earnings rate to an excess and a number of days. What it shows is that the controllable variable is time rather than amount, which is the argument for checking the transfer balance account whenever anything changes rather than annually.
Source: ATO — Transfer balance cap
The thing that costs money here is time, not the mistake. An excess picked up in a fortnight is a rounding error; the same excess found at the annual statement has been accruing notional earnings for eleven months. I would look at the transfer balance account in myGov whenever anything changes, and particularly after inheriting a reversionary pension, which is the case that credits without anyone doing anything.
FAQ
What is an excess transfer balance and how is the excess transfer balance tax applied?
It is the amount by which your transfer balance account exceeds your personal cap. The excess must be commuted out of retirement phase, and tax is charged on the notional earnings attributed to it for the period it was over, at a lower rate for a first breach.
Can I commute part of my pension back to accumulation to fix a breach?
Yes, and that is the intended fix. A partial commutation creates a debit in your transfer balance account and moves the money into accumulation, where it remains in super and its earnings are taxed at 15%.
How is my personal transfer balance cap calculated with indexation?
Indexation is applied proportionally to the unused share of your cap. Someone who has used most of their cap receives little of each increase, so the general cap figure may not be the one that applies to you. Your personal cap is shown in your myGov account.
Sources
Regulator references
- ATO — Transfer balance cap · Australian Taxation Office · 2026The cap that applies when a retirement phase income stream starts.Last verified: 2026-09-07
- ATO — Transfer balance cap (rates and thresholds) · Australian Taxation Office · 2026The general transfer balance cap by income year and how indexation is applied.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.