Transfer Balance Cap Explained (2024/25)

What’s the Transfer Balance Cap? 

The Transfer Balance Cap is the maximum amount of your super you can move into a pension account to start receiving income. For the 2024/25 financial year, the cap is $1.9 million.

Why Does It Exist? 

The cap is in place to limit the amount of super you can use for tax-free pension earnings. When you move super into a pension account, all the investment earnings (including capital gains) are tax-free. Without the cap, someone with a large super balance could transfer millions and enjoy all those tax-free gains.

What If My Super Is Over the Cap?

If your super balance is over the cap, no worries! You can still leave the extra funds in your accumulation account (subject to regular tax). If you transfer more than $1.9 million into pension phase, you'll have to pay a 15% tax on the excess amount.

How Does the Cap Work? 

When you start a pension, the amount you transfer counts against your cap. If you later move funds back to an accumulation account, your cap space increases. If the Transfer Balance Cap increases, you can get a proportional increase based on how much of the cap you’ve already used.

What About Investment Growth in My Pension? 

If your pension balance grows over the cap due to investment earnings, you don’t need to do anything. You can leave the extra amount in your pension. The key is that the amount you originally transferred into pension phase must not exceed the cap.

Examples:

Starting a Pension: If you transfer $1.425 million into a pension, you’ve used up $1.425 million of your $1.9 million cap. You still have $475,000 available for future pension transfers.

Indexation: If the cap increases by $100,000, and you’ve used 75% of it, you’ll get 25% of the increase, adding $25,000 to your cap.

What if I Have a Defined Benefit Pension? 

A defined benefit pension has its own rules, but it still counts towards the $1.9 million cap. To figure out how much of your defined benefit pension counts, multiply your annual income by 16. For example, a $60,000 annual pension equals $960,000 towards your Transfer Balance Cap.

Key Points to Remember:

-          The cap is $1.9 million in 2024/25.

-          If your super balance exceeds this, the extra stays in an accumulation account.

-          You can’t transfer more than the cap into pension phase without paying excess tax.

-          Investment earnings in your pension are tax-free.

The Transfer Balance Cap keeps things fair and prevents massive tax advantages, but it’s manageable if you keep track of what’s in your pension phase!