Making the most of the transfer balance cap

Superannuation has always represented one of the most tax effective methods to save for your retirement. The tax concessions available have meant that caps have been placed on the maximum amount that you can have within superannuation.

The transfer balance cap (TBC) is the maximum amount a person can use to start a retirement income stream, also known as an account-based pension. Although the TBC has been adjusted due to inflation, it is still uncertain if the Labor government will honor the increase in the upcoming federal budget in May. So you could say that the TBC is TBC (sorry, dad joke).

If the increase does get legislated, then it is expected that from July 1, those looking to boost their retirement savings with after-tax (non-concessional) contributions could benefit from an increase in the TBC from $1.7 million to $1.9 million. Clearly, this strategy is only for those who have significant savings in place, however this could mean that a couple could have up to $3.8m in retirement and not pay a single dollar of tax on any income they generate, or any pension payments they receive for the rest of their lives (a pretty good deal).

There are some complexities involved though for those who already have commenced pensions, because the TBC limit can be different for these people and they may not be eligible for the full indexed amount. The tax-free super cap is expected to be most beneficial for those with savings between $1.5 million and $1.7 million, as the threshold for non-concessional contributions has been extended.

Therefore timing and careful planning is important in this respect if you are looking to maximise your amounts into super in the most tax effective way.

Further consideration should also be given on whether there are benefits of implementing a withdrawal and recontribution strategy for estate planning purposes. Many people are not aware that superannuation benefits that are paid to adult children upon death can often be taxed up to 17%.

Having access to the non-concessional contribution cap (which is the maximum amount that can be annually contributed into superannuation as an after-tax contribution) can assist with minimising this dreaded death tax. The limit remains at $110,000, however some people will be eligible to contribute up to $330,000.

Thinking about selling your home and downsizing? Well, a couple may be able to use the non concessional contribution cap ($330,000 each person) as well as the downsizer contribution ($300,000 each person) and could possibly put up to $1.26m into superannuation.

For those approaching retirement, waiting until July 1 to start a retirement phase pension could result in the full $1.9 million being allowed into the pension, which is $200,000 above the current cap. However, the best course of action will depend on individual circumstances.

It's important to understand the impact of the indexation on each person's TBC before devising a strategy, and a good financial adviser can help you with identifying an appropriate strategy for you.

Neelan Sornalingam

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