Tips and traps for transfer balance caps

For anyone receiving a superannuation pension or starting a pension from 1 July 2017, the Transfer Balance Cap has become an integral part of their superannuation. There are a number of tips and traps to avoid being caught out so that part of the pension balance is not required to be transferred to accumulation phase, or have it withdrawn as a lump sum.

The Transfer Balance Cap of $1.6 million, for most people, limits the amount that can be used from accumulated superannuation savings to commence a pension, which is in retirement phase, including death benefit and reversionary pensions. For anyone with a pension in place on 1 July 2017, the total amount is the pension account balance on that day; and for anyone who commences a pension from that time, it is the balance at commencement. In some rare cases, such as defined benefit pensions, the amount counted against the Transfer Balance Cap is an amount based on the first payment of the pension. The starting amount of the pension is then credited to a member’s Transfer Balance Account balance.

There are some amounts which can reduce the amount counted towards a person’s Transfer Balance Account balance, which includes lump sum withdrawals from the pension. These are referred to as commutations of the pension, and it is possible to commute part or all of the pension balance to a lump sum depending on the type of pension. However, withdrawals of pension amounts from the pension balance and income earned by the super fund and added to the pension balance, do not reduce a person’s Transfer Balance Account balance.

When a person exceeds their Transfer Balance Cap, they are required to transfer the excess to their accumulation account, or withdraw it from their super fund, as a lump sum. Any excess is subject to a penalty which is also counted against the person’s Transfer Balance Cap.

Here are some tips and traps that can help to stay within the Transfer Balance Cap and avoid any excess, as well as prevent being penalised.

Stopping pensions when investment values have dropped

One question that beneficiaries often asked is whether it is better to stop pensions when investment markets have fallen rapidly. The ultimate decision is up to the individual but for Transfer Balance Cap purposes, stopping a pension may have some traps.

Example

Diane has commenced an account-based pension in July 2019 with a value of $1.3 million, which is counted towards her Transfer Balance Cap. This means that her Transfer Balance Cap balance will have a credit of $1.3 million. In April 2020, there is a big fall in the market value of the fund investments supporting Diane’s pension to $800,000. If Diane decided to stop her pension then, and transfer it to her accumulation account, in the fund there would be a debit to her Transfer Balance Cap account of $800,000.

After stopping the pension in April 2020, it would mean that her Transfer Balance Cap account would still be in credit to the tune of $500,000 ($1.3 million less $800,000) even though she is not drawing any pension from the fund. If the investment markets rise dramatically in market value before Diane commenced a new pension, she may find her accumulation balance has increased significantly. It may have been better for her to remain in pension phase as stopping the pension may have not been the best strategy for her Transfer Balance Cap.

The trap that can occur with drops in investment values is it can give a false impression that it is possible to commence a new pension up to the value of the original pension. However, if Diane was to do that, her Transfer Balance Cap balance would increase with a credit of $1.3 million. When added to the Transfer Balance Cap account credit of $500,000, she would end up with a credit Transfer Balance Cap balance of $1.8 million. This would result in an excess Transfer Balance Cap determination being issued by the ATO.

Stopping pensions when investment values have risen

When investment values have increased, stopping the pension may have different consequences especially for anyone whose pension account balance has increased significantly since it commenced.

Example

Martin commenced an account-based pension in November 2020 with $1.6 million. Martin’s Transfer Balance Cap account will be credited with $1.6 million. In February 2020, when Martin considers the investment markets have had a good run, he decided to stop his pension and return it to accumulation phase. The balance of Martin’s account-based pension in February 2020 increased to $1.8 million, due to some good judgement and advice.

For Transfer Balance Cap purposes, when Martin decides to stop his pension his balance will be debited with $1.8 million. Martin’s Transfer Balance Cap account balance will now be in debit to the amount of $200,000 ($1.6 million - $1.8 million). If he wishes to commence another pension in future, he will be able to use up to $1.8 million in view of the debit that has been created when he stopped his pension in February 2020.

Starting a pension before investment values rise

If it is expected that investment values will rise, then it may be an advantage to commence a pension. The reason is that the amount used to commence the pension will be counted as a credit against a person’s Transfer Balance Cap. Any increase in the value of investments which supports the pension once it has commenced, will not be counted against the person’s Transfer Balance Cap.

Drawing more than the minimum pension

For those who are in receipt of an account-based pension or a transition to retirement pension in retirement phase, it is common practice that only the minimum pension will be withdrawn. However, situations may arise where a person may wish to draw more than the minimum for different reasons, such as increased living expenses, a holiday trip or other expenditure.

Generally, there are probably three ways to approach the withdrawal of the additional amount for Transfer Balance Cap and pension withdrawal purposes. The first is to have the additional pension withdrawal to continue as a pension payment. The second is to treat the amount over the minimum pension as a lump sum withdrawal from the pension account. And thirdly, if the individual has an accumulation account, it may be beneficial to withdraw the minimum pension but to withdraw the additional amount required from the accumulation account.

The first option above will reduce the pension balance and have no impact on the person’s Transfer Balance Cap. The second option will reduce the balance in the person’s Transfer Balance Cap account as it is a conversion of part of the pension to a lump sum and create a debit against their account. The third option will allow the pension balance to be kept to its maximum but have no impact on the person’s Transfer Balance Account balance as it relates to their accumulation account in the fund.

Excess Transfer Balance Cap determinations

When a person has exceeded their Transfer Balance Cap, a determination by the ATO will be issued to let them know of the excess and the amount of the penalty. The penalty amount is taxed at 15% for the first excess, and 30% for the second and further excesses.

If a person discovers an excess has occurred, they could transfer the amount to accumulation phase or withdraw it from the fund. They may find that the amount notified by the ATO differs from their calculation as the amount of the penalty would be added to any pension excess. So they should be prepared to expect they may need to make a further transfer once the determination has been received.

MyGov account

A person’s Mygov account includes information about superannuation contributions, total super balance and Transfer Balance Cap. However, the information on it may not be completely up-to-date because the reporting of the commencement of a pension from a fund may take some time depending on the type of fund that is paying the pension. A pension that is paid from an APRA fund, such as a retail, industry or government superannuation fund, is required to be reported within 10 days.

For SMSFs, the reporting of a pension depends on whether a member has a total super balance of more or less than $1 million on 30 June prior to the first pension that is required to be reported. If at least one member’s total super balance is greater than $1 million, then pensions are required to be reported for any fund member from 28 days after the end of the quarter in which it commenced. For SMSFs which have all members with total super balances of less than $1 million, then reporting of the pension commencement is not required until the annual return is required for the SMSF.

Because of the different reporting dates, it is worthwhile to keep a check on any pensions which have not been reported to make sure a person’s Transfer Balance Account balance is fully up-to-date and that excesses do not arise from situations such as: a pension commencing, including death benefit pensions; or a pension is commuted and transferred to accumulation phase; or withdrawn from the fund as a lump sum.

Understanding your Transfer Balance Account

The impact of commencing and ceasing a pension since 1 July 2017 has required better planning and timing that in the past. There are situations when there are rises and falls in investment markets, as well as making sure an individual has accurate information on the values that were used to commence pensions for Transfer Balance Cap purposes as they may differ from their current balances.