The transfer balance cap is a lifetime cap on the amount of super you can transfer from the accumulation phase of super into the tax-free retirement phase. Essentially, it is the maximum amount you can use to start a pension.

The general transfer balance cap will increase from $1.7 million to $1.9 million on 1 July 2023.

Why is there a transfer balance cap?

Before the cap was introduced in 2017, there was no limit to the amount you could have in the tax-free retirement phase, meaning large balances could remain without any tax on earnings.

The transfer balance cap limits the tax-free portion of super. If your super balance is higher than the cap, the excess can remain in the accumulation phase, where earnings are taxed.

How is the transfer balance cap calculated and how does it work?

When you first start a superannuation income stream or transfer funds to a pension account, you will start to have a ‘transfer balance account’, which is managed by the Australian Taxation Office (ATO). This account records the transactions that count towards your personal transfer balance cap, using a debits and credits system.

You can make multiple transfers into your retirement income stream, as long as you don’t exceed the cap.

If you have super savings above the transfer balance cap, you can continue holding these in the accumulation phase where earnings are taxed at a maximum of 15%.

What counts towards the transfer balance cap?

• The combined balance of all the super you transfer from your accumulation accounts to your pension accounts (including any account-based pension) counts towards the cap, regardless of how many accounts you have.

• Any death benefits you take as a pension will also be included.

• If the amount in your pension account goes down over time, you can’t 'top it up' if you have already used all your personal cap space.

What’s excluded?

• If the amount in your pension account grows over time (through investment earnings) to more than your personal transfer balance cap, you won’t exceed your cap.

• Amounts held in a transition to retirement (TTR) pension will not count towards your transfer balance cap (these funds are already taxed at 15%) until certain conditions of release are met.

• The age pension and other types of government payments are excluded from the cap.

• Pensions received from foreign super funds do not count towards the cap.

What happens if you exceed the cap?

If the amount you transfer exceeds the cap, you’ll be required to pay 15% excess transfer balance tax on the notional earnings (or 30% if you’ve breached the cap previously). You’ll also need to move the excess funds out of your pension account.

If you receive an excess transfer balance determination from the ATO and still don't move the excess funds, the ATO will issue a commutation authority to your superannuation fund to commute the excess amount.

How does indexation work?

The cap was introduced in July 2017 at $1.6 million and is reviewed each financial year. It’s indexed in $100,000 increments in line with the consumer price index.

When the general transfer balance cap is indexed, you may be eligible for a proportional increase to your personal cap, based on how much of the cap you have already used. Your entitlement depends on

• the financial year when you start your transfer balance account, and

• your highest ever balance in your transfer balance account.

If at any time you reach or exceed your personal transfer balance cap, you will not be entitled to indexation of the transfer balance cap.

You can read more about transfer balance accounts and cap information via the ATO’s website.