Transfer balance cap
Personal transfer balance cap
Clients will have their own personal transfer balance cap, which determines the amount they can transfer into retirement phase income streams.
Initially, a client's personal cap will equal the general transfer balance cap in the year they first have a retirement phase income stream count against their transfer balance account:
- For clients with an existing retirement phase income stream at 30 June 2017, their personal transfer balance account commences on 1 July 2017 and their cap is initially $1.6 million.
- For clients who commence their first retirement phase income stream on or after 1 July 2017, their personal transfer balance account commences on the day their income stream commences. Their personal cap will equal the general transfer balance cap in that financial year.
Over time, a client's personal cap may differ from the general transfer balance cap due to proportional indexation.
Proportional indexation of the personal transfer balance cap
Where a client has commenced a retirement phase income stream but has not fully utilised their personal cap, their personal cap will be subject to proportional indexation.
Under proportional indexation, the unused portion of the client's personal cap will be indexed in line with the indexation of the general transfer balance cap.
Glenda retires on 1 July 2017 and immediately commences a $1.2 million account based pension.
As Glenda commenced her first retirement phase income stream in 2017-18, her personal transfer balance cap is equal to the general transfer balance cap of $1.6 million. In this case, Glenda will have used 75% ($1.2 million/ $1.6 million) of her personal cap and will have an unused cap proportion of 25%.
On 1 July 2020, the general transfer balance cap is increased by $100,000 to $1.7 million due to indexation.
Assuming Glenda has not commenced any other retirement phase income streams in the interim, her personal cap will then be increased by $25,000 ($100,000 x 25%) to $1.625 million. In this case, Glenda will then have $425,000 ($1.625 million - $1.2 million) of her personal cap remaining.
Unused portion of personal cap based on highest transfer balance
When determining the amount of unused personal cap for the purposes of applying indexation, the client's 'highest transfer balance' is used.
The highest transfer balance is the highest balance of the client's transfer balance account since commencement. This balance is used for proportional indexation even if the balance has subsequently reduced due to rollovers or lump sum commutations.
The intention behind this rule is to only allow the portion of the personal cap that has never been utilised to be indexed. This prevents clients from being able to rollover or commute amounts from retirement phase income streams and increase the indexation of their personal cap
Ben commences an account based pension on 1 December 2017 for $1.4 million. On 1 October 2018, Ben withdraws $500,000 from the account based pension as a lump sum commutation.
In 2020-21, assume the general transfer balance cap has been indexed to
$1.7 million. To work out the indexation of Ben's personal cap, we need to use the "highest transfer balance" to determine the unused proportion of the transfer balance cap.
In this case, the highest transfer balance was $1.4 million, it is not reduced by the amount of the lump sum commutation. To work out the unused proportion for indexation purposes, we use Ben's personal cap of $1.6 million which applied on the day he reached his highest transfer balance of $1.4 million. At that time, Ben has used 87.5% ($1.4 million / $1.6 million) of his personal transfer cap and has 12.5% remaining.
Assuming Ben has not commenced any other retirement phase income streams in the interim, his personal transfer balance cap will then be increased by $12,500 ($100,000 x 12.5%) to $1,612,500.
No indexation if personal cap fully used
As only the unused personal transfer balance is indexed, once a client fully utilises their personal transfer balance cap they will not be eligible for any further increases due to indexation of the general transfer balance cap, as their remaining unused proportion will be nil.
From the previous example, if Ben had instead commenced a pension for
$1.6 million on 1 December 2017, he would have used up his entire personal transfer balance cap.
In this case, his personal cap would not be indexed when the general transfer balance cap increases to $1.7 million in 2020-21, as he has no unused personal cap available.
This is the case even if Ben subsequently made a lump sum commutation from the account based pension, as Ben's 'highest transfer balance' of $1.6 million is used for this calculation.
Last modified: Friday, January 12, 2018