Ask the Expert: Transfer Balance Cap, how to invest cash, death benefit
Question 1
Craig, can you please explain how the transfer balance cap works? I had thought that it was essentially the maximum amount that a person could have in their pension account at any one time and could be topped up if the account dipped below that amount. I am now thinking that I have it wrong in that it is the maximum amount that can be put in a pension account over the lifetime of that account. Can you cover the rules on it in one of your very helpful answers?
At a high level you are correct, your ‘personal transfer balance cap’ essentially caps the amount you can have in the pension phase of superannuation.
Technically though, it’s how much you can transfer into a pension rather than how much you can have in a pension at any one time.
It operates on a credit and debit system.
When you transfer money into a pension, it’s a credit.
If you move money back to super or take out a lump sum withdrawal from your pension, these are both debits.
Note, however investment earnings (positive or negative) are not credits or debits, neither are regular income payments.
The general Transfer Balance Cap is currently $1,900,000 i.e. this is the maximum amount you can transfer over into a pension. You can have multiple pensions, but the starting balances can’t add up to more than $1,900,000.
From there it doesn’t matter if your balances go up or down due to investment returns or pension payments as none of these are counted under the Transfer Balance Cap.
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This is a lifetime limit, however, indexation applies. And this is where it gets more complex.
As soon as you start a super pension you will create your personal Transfer Balance Cap (as opposed to the General Transfer Balance Cap) that only applies to you. This then determines how much indexation is applied for you.
As an example, let’s say you start a pension for $1,520,000 and the General Transfer Balance Cap is $1,900,000.
Let’s also assume the General Transfer Balance Cap is indexed in the future by $100,000 to $2,000,000.
As you used 80 per cent of the General Cap, only 20 per cent of indexation will apply to your Personal Transfer Balance Cap, in this case $20,000 ($100,000 x 20 per cent).
Your personal cap would now be $1,920,000 ($1,900,000 + $20,000).
Anyone who has not started a super pension previously is currently entitled to the full $1,900,000 General Transfer Balance Cap. Note that if you have fully used the general Transfer Balance Cap then you receive no indexation.
For those who have started a pension and have their ATO linked to MyGov, you can check how much available space you have under your Transfer Balance Cap.
Question 2
My partner and I have both just turned 67 and become pensioners. As older women neither of us has a super fund account. We have now sold our second property to clear loans and reduce expenses. What is the best way to invest $150,000 we now have sitting in the bank? Is a super fund a sensible option?
You first need to work out what your financial goals are, and your investment time frame.
Superannuation is worth considering and there would be no issue in one or both of you opening up a new account.
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Superannuation is just the structure to hold the investment in. You would still need to select an appropriate investment option/s within it.
However, just leaving it in super may not be the best option, depending on your overall financial situation, as all earnings are taxed at 15 per cent.
Whereas if you do not hold any other investments, you are probably not paying any income tax.
Where it makes sense to contribute the funds to super is where you then convert the funds to an income stream within the super environment, such as an account-based pension, where earnings are tax free.
You can then also set up regular tax-free income payments.
Question 3
In relation to a widow’s options on death of spouse, can she withdraw the money and then recontribute all of it as non-concessional contributions (in relation to a previous response you made)?
If you receive a superannuation death benefit from a deceased spouse, you can either have the funds paid to you via a superannuation income stream, or you can simply cash out the funds from super altogether.
If you go for the latter option, cashing out, you can contribute the funds back into super via after tax (non-concessional) contributions.
However, if you are over the age of 75, these contributions cannot be made, so the funds would be stuck outside of super.
There are also caps on how much you can contribute to super each year.
Depending on how much you already have in super and your age, you may be able to use the ‘bring forward’ rule and contribute up to $360,000 in one go.
Therefore, you would need some careful forward planning and potential financial advice.
Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.
