Author Topic: Superannuation transfer balance caps  (Read 310 times)

deborah

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Superannuation transfer balance caps
« on: March 18, 2023, 12:56:02 AM »
Iíve been thinking about transfer balance caps, and Iíd like to have some discussion about their implications for the early retiree. I think I may be getting a bit confused, so Iíd appreciate feedback no matter  whether you think Iím right or wrong.

When I started to draw down superannuation, there were no caps, and people were advised to withdraw what they wanted from superannuation (at least the minimum), and put back whatever they didnít use as a non concessional contribution. This kept as much as you could in super and diluted the percentage of concessional vs non concessional contributions, so when you died, your estate would have less tax to pay on whatever remained (assuming it didnít go to a dependent).

But then the caps came in in 2017. As I understand it, once your super goes into retirement/pension phase the ATO calculates your lifetime cap (letís call it A) which was originally $1.6million, the amount you initially have in retirement/pension phase (B), and the difference between the two numbers (C = A - B). If C is negative, they send you a nastygram, and you have to do something else with that money.

A, B and C donít change if you withdraw money, or if your retirement/pension account earns income from dividends etc.. However, whenever you add money (M) to it, B and C change. B = B + M and C = C - M. So C gets smaller.

The cap gets indexed by inflation, $100k at a time. Last year (?) inflation finally increased the balance cap, and it changed to $1.7million. If you started a retirement/pension account today, A would be $1.7million. However, if you already had a cap, it doesnít increase by $100k.
Your new A = A + $100k x (A - C)/A

The less you have in super, the bigger your lifetime cap becomes. If you ever hit the cap, your cap will never increase.

Because inflation is growing, they expect the cap to increase by another $200k.


So what does that mean for the early retiree?

1. The old strategy of rolling the amount you donít spend back into super each year seems to me to be a way to reach the cap, and to end up with a lower cap than youíd otherwise have.
2. Keeping investments that donít earn much in accumulation phase will increase the cap.
3. Maybe early retirees shouldnít worry about all this. After all, by definition weíre frugal, and exit employment early, so people may never have that much in super. This is especially true if you are a couple and each person has half of the accumulated super in their own account. The caps make it more sensible to ensure that each person has about half the super.
4. On the other hand, compound interest increases your money astoundingly, and itís worth while thinking about this. Several Australians on the forum have expressed surprise at how much their superannuation has grown over the years. And itís likely that, because weíre frugal, our super will grow after retirement.
5. Since early retirees probably donít have much income after theyíve retired and before they can access super, and itís fairly easy to put money into super after theyíve reached preservation age, maybe itís better to delay making additional superannuation contributions until you reach preservation age.
« Last Edit: March 18, 2023, 03:29:10 AM by deborah »

Lukim

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Re: Superannuation transfer balance caps
« Reply #1 on: March 19, 2023, 03:50:07 AM »
I am definitely not across all the details on this (I pay someone to do that) but my understanding is that the amount you are allowed to have in your pension account goes up and down with the underlying investments.

So if someone started with $1.6m in 2017, it should have grown (then probably went down in 2021/22) and should be growing again now.

Someone starting now would be able to put $1.7m into the pension account (probably more after 1 July 2023).

Once it is in the pension account, you have to draw the minimum and if your balance is over the cap, you can't personally contribute more (but an employer will contribute).

That is my rough understanding - but I could be wrong.

deborah

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Re: Superannuation transfer balance caps
« Reply #2 on: March 19, 2023, 04:36:54 AM »
Thanks lukim, Iíd misread things, and your B can go down, but only when you make a lump sum withdrawal (but not a pension payment).

When your employer contributes, the money is added to your accumulation account. It canít be added to the pension/retirement account if you are over your transfer balance cap.
« Last Edit: March 19, 2023, 04:39:27 AM by deborah »