The Transfer Balance Cap: Limits on Tax-Free Super
There's a limit to how much super you can move into the tax-free retirement phase. The transfer balance cap currently sits at $1.9 million, and understanding how it works is essential for anyone with significant super savings -- or planning to build them.
What Is the Transfer Balance Cap?
The transfer balance cap (TBC) is the maximum amount of super you can transfer from the accumulation phase into the retirement phase (pension phase), where investment earnings are tax-free. Introduced on 1 July 2017 with an initial cap of $1.6 million, it has since been indexed to $1.9 million for the 2024-25 financial year.
The TBC exists because, in the retirement phase, all investment earnings within the super fund are completely tax-free. Without a cap, wealthy individuals could shelter unlimited amounts in this tax-free environment. The TBC ensures that the tax-free benefit is limited to a reasonable amount for funding retirement income.
Any super balance above the TBC must remain in the accumulation phase, where investment earnings are taxed at 15%, or be withdrawn from super entirely. While 15% is still a concessional rate compared to personal income tax, it's not as advantageous as the 0% rate in retirement phase.
Indexation: The general TBC is indexed in $100,000 increments in line with CPI. It moved from $1.6 million (2017-18 to 2020-21) to $1.7 million (2021-22 to 2022-23) and then to $1.9 million (from 2023-24). Future increases will continue in $100,000 steps as CPI warrants.
Your Personal Transfer Balance Cap
Here's where it gets nuanced. The general TBC ($1.9 million) applies to everyone who has never started a retirement-phase income stream. But once you've used any of your cap, your personal TBC may differ from the general cap due to how indexation is applied.
Your personal TBC depends on when you first used your transfer balance cap. If you used 100% of your cap at any point (for example, transferred $1.6 million in 2017), your personal cap remains at that original level -- you don't benefit from subsequent indexation. If you only used a portion of your cap, you receive proportional indexation.
Example: Personal TBC Calculations
Anne: Never started a pension. Her personal TBC is the current general cap of $1.9 million.
Brian: Transferred $1.6 million in 2017 (100% of the cap at the time). His personal TBC remains $1.6 million. He receives no indexation because he has used 100% of his cap.
Carol: Transferred $800,000 in 2017 (50% of the $1.6 million cap). She used 50% of her cap, leaving 50% unused. When the general cap indexed to $1.9 million, her unused portion was indexed: 50% x $1.9 million = $950,000. Her personal TBC is now $800,000 (used) + $950,000 (unused, indexed) = $1.75 million.
Your personal TBC is tracked through the ATO's transfer balance account, which records all credits (amounts entering retirement phase) and debits (amounts leaving retirement phase, such as commutations back to accumulation or lump-sum withdrawals). You can view your transfer balance account through myGov.
What Happens If You Exceed the Cap
If you transfer more than your personal TBC into retirement phase, you have an "excess transfer balance." The ATO will issue a determination requiring you to commute (remove) the excess amount from retirement phase. You can either move it back to accumulation phase or withdraw it from super entirely.
There are also tax consequences for exceeding the cap:
- First-time excess: Notional earnings on the excess amount are taxed at 15% (calculated using the general interest charge rate)
- Subsequent excess: Notional earnings on the excess are taxed at 30%
The excess amount itself isn't taxed -- the tax applies to the deemed earnings on the excess for the period it remained in retirement phase. You have 60 days to commute the excess from the date of the ATO's determination.
Important distinction: Investment growth within your retirement-phase account does not count against your TBC. If you transfer $1.9 million and it grows to $2.5 million, you have not exceeded the cap. The TBC only measures amounts transferred in, not the subsequent growth.
Death Benefits and the TBC
When a member of a super fund dies, any death benefit paid as a pension to a beneficiary counts against the beneficiary's own transfer balance cap. This is an important consideration for couples, as it can result in the surviving partner exceeding their personal TBC.
If both partners have fully utilised their $1.9 million TBC and one passes away, the surviving partner cannot receive the deceased's super as a pension income stream -- it would exceed their cap. The excess would need to be paid as a lump sum, which may have different tax implications depending on the components and the beneficiary's age.
Planning for Couples
A couple with combined super of $3.8 million can each have $1.9 million in retirement phase. But if one partner dies, the survivor can only hold $1.9 million in retirement phase. The deceased's balance must be dealt with:
- Paid as a tax-free lump sum to the surviving spouse (if over 60)
- Partially taken as a reversionary pension up to the survivor's remaining TBC space
- The excess withdrawn from super
Nominating your pension as a "reversionary pension" to your spouse gives a 12-month grace period before the amount counts against their TBC, providing more time to plan.
Strategies for Managing the TBC
If you have super balances approaching or exceeding the TBC, strategic planning can help you make the most of the tax-free retirement phase environment while managing the amounts that must remain in accumulation.
Delay Starting a Pension to Benefit from Indexation
If your super balance is below the current general TBC, delaying the start of your pension until the cap is indexed higher could give you a larger personal TBC. However, this must be weighed against other factors like access to tax-free income and the tax on accumulation-phase earnings.
Equalise Super Between Partners
For couples, having roughly equal super balances ensures both partners can make full use of their individual TBCs. Contribution splitting, spouse contributions, and careful management of super balances can help achieve this. A couple with $1.9 million each has $3.8 million in retirement phase, while a couple with $3 million and $800,000 only has $2.7 million in retirement phase (as the partner with $3 million is capped at $1.9 million).
Reversionary Pension Nominations
Nominating your pension as reversionary to your spouse provides a 12-month period after death before the pension counts against the surviving spouse's TBC. This gives time to reorganise finances and manage the transition without being forced into hasty decisions.
How Talk Through Wealth Helps
The transfer balance cap adds complexity to retirement planning, particularly for couples with significant super balances. Talk Through Wealth helps you navigate these rules and optimise your strategy.
- Calculate your personal transfer balance cap based on your history
- Model the tax difference between accumulation and retirement phase for amounts above the TBC
- Optimise the split of super between partners to maximise combined retirement-phase benefits
- Plan for death benefit scenarios and the impact on the surviving partner's TBC
- Project when future indexation of the general cap might benefit your situation
Optimise Your Transfer Balance Strategy
See how the TBC affects your retirement plan and explore strategies for couples.
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