I’ve been thinking about transfer balance caps, and I’d like to have some discussion about their implications for the early retiree. I think I may be getting a bit confused, so I’d appreciate feedback no matter whether you think I’m 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 didn’t 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 didn’t 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 (let’s 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 don’t 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 doesn’t 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 don’t 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 you’d otherwise have.
2. Keeping investments that don’t earn much in accumulation phase will increase the cap.
3. Maybe early retirees shouldn’t worry about all this. After all, by definition we’re 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 it’s worth while thinking about this. Several Australians on the forum have expressed surprise at how much their superannuation has grown over the years. And it’s likely that, because we’re frugal, our super will grow after retirement.
5. Since early retirees probably don’t have much income after they’ve retired and before they can access super, and it’s fairly easy to put money into super after they’ve reached preservation age, maybe it’s better to delay making additional superannuation contributions until you reach preservation age.
