The Transfer balance cap is a relatively new piece of legislation and was constructed to limit the amount of money that could enter the tax free retirement phase of superannuation known as a pension account. The purpose of this legislation was to allow people to accumulate enough money in a tax free retirement account to provide for a comfortable to high standard of living throughout retirement without allowing those of greater means an easy system to avoid tax completely in retirement.

With the introduction of new legislation there are in practice essentially three phases:

1. Accumulation – This is simply known as superannuation and is the phase used during your working life as you grow the account, during this phase the pre tax contribution tax rate is 15% along with the earnings rate and capital gains rate (although note that a Capital Gains Tax discount applies for assets held for more than a year effectively bringing the tax rate down to 10%).
2. The Transition to Retirement Pension phase – Also known as a TRIS pension, this formerly shared the beneficial tax rates of a pension account but has been changed to share the same tax rates as the accumulation phase, with differing tax rates for the withdrawals from the pension account that we won’t detail here. And
3. The Pension Phase – This is your retirement account, you do not pay taxes on earnings regardless of it being from income or capital growth, nor do you pay tax on withdrawals from the account, except for certain death benefits.

The pension phase is where taxes drop away and is the most favourable. The Transfer Balance Cap currently allows total lifetime contributions of $1,600,000, this number will be indexed over time in installments of $100,000 with indexation being rounded down and moved in line inflation. However as you use this cap the amounts used are locked in at the cap available at the time of use, as such if you use a portion before indexation your available limit will be pro rata instead of the additional $100,000 being added in installments.

However your cap can be made strategically accessible by utilizing commutations (lump sum withdrawals from the account), where income withdrawals do not affect your available cap capital withdrawals do, providing an opportunity for planning. Complications also arise when considering the potential benefits and detriments of taking superannuation inheritances for a surviving partner as a lump sum or an income stream and the use of reversionary beneficiaries.

The seeming simplicity of this legislation belies complex strategic considerations that can drastically affect the outcome of your retirement. If you wish to discuss this further we welcome your call.