In 2016, the Turnbull government made major changes to superannuation, which took effect from July 1, 2017. They were made with the aim of restricting how much you could have in the low tax superannuation environment.
They reduced concessional contributions to $25,000 a year, and non-concessional contributions to $100,000 a year.
Furthermore, they reduced the amount that can be held by retirees in the zero-tax pension mode, by introducing a Transfer Balance Cap (TBC) that limited the amount an individual can transfer into their pension fund to $1.6 million.
The final change prohibited anybody from making further non-concessional contributions if their super balance was more than $1.6 million.
The origins of the $1.6 million figure are somewhat obscure, but the best information I can get is that it was double the assets test cut-off point for a pensioner couple, and was a sum that would provide an indexed income of $80,000 a year for 25 years if that fund earned a very conservative 4 per cent per annum.
That income was approximately four times the single pension, and assumed that all capital would be expended after 25 years.
Almost four years have passed since then, and thanks to indexation, from July 1 the new TBC will be $1.7 million. If you have already used your $1.6 million TBC, you will be unaffected by the indexation changes.
If you have not yet used your TBC, and you can hold off starting a pension from your fund until July 1, your TBC will be $1.7 million.
If you have transferred only a portion of your TBC, say $800,000, you will be entitled to a proportional increase to the cap based on the unused portion, in this case 50 per cent. The calculation is a little complicated, but your financial advisor or your fund could work it out easily.
The bottom line is that, by waiting until July 1, you have the chance of an increased TBC.
Many people are under the false impression that the TBC is the maximum you are allowed to hold in the tax-free pension fund. But actually the TBC is the maximum amount an individual may transfer from accumulation mode to pension mode in their lifetime.
When you have transferred up to your TBC, you are not allowed to transfer any new funds into pension mode, but the money you hold in pension mode can continue to grow.
Once you are in pension mode, you are required to make minimum pension payments each year and these increase with age. But the amount in your pension fund can grow if you make withdrawals at the minimum rate and your fund earns a higher rate.
If you have funds remaining in accumulation mode after transferring up to your TBC into pension mode, income tax on these funds will continue to be a flat 15 per cent.
If you have funds in both pension mode and accumulation mode, any increase in the overall fund value will be applied proportionately to both, unless you have a segregated fund, which is unusual.
If you have money in both modes, and need to make a lump sum withdrawal, you should get advice about which one to take it from.
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In most cases you are better off to withdraw from the accumulation fund, as lump sum withdrawals from a pension fund can affect your TBC ... it's complicated, so best to seek advice before you act.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email firstname.lastname@example.org