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Thursday, 28 January 2021

Super caps increasing from 1 July 2021


The general transfer (into pension mode) balance cap (TBC) for Australia Superannuation accounts will be increasing from A$1.6 MM to A$1.7 MM from 1 July 2021 due to the CPI index reaching 117.2 in the December 2020 quarter. The associated total superannuation balance (TSB) will also be increasing to $1.7 million. The TSB controls the non-concessional contributions cap for an individual - if you have exceeded the TSB in the previous annual tax reporting for your SMSF you will no longer be able to make non-concessional contributions into your superannuation (i.e. that annual cap drops from $100K to $0 when the TSB has been reached).

For individuals that have already made some transfer of superannuation from accumulation into retirement phase, their individual TBC will lie somewhere between $1.6 MM and $1.7 MM. If you have never previously transferred super into retirement phase, the new cap of $1.7 MM will apply from 1 July 2021. If you had (at any time) previously had a TSB reach $1.6 MM, then you currently have a TSB of $1.6 and that will remain (i.e. you will never be able to transfer additional super from accumulation into retirement phase.

For anyone who has previously used up part of the TSB the calculation of the remaining TSB, and how it will increase with future increases in the general TSB,  are fairly complex. The ATO will provide an individual's personal TSB via ATO online - but it will only be updated after your SMSF's annual tax return has been processed by the ATO (so there will be a period each year after 1 July when an individual will be unable to find out their TSB from the ATO!?).

Anyhow, now that I know the new TSB that will apply from 1 July this year, I can update my super tracking spreadsheet to show the new TSB target against my SMSF projections.

It may seem that because the TSB will increase with CPI you might be better off to wait with making transfers from accumulation to retirement phase as long as possible. But, assuming your SMSF returns are sufficient to make your balance continue to grow while in pension phase by more than the CPI plus the minimum pension withdrawal rate (currently 2% for those under 65, but increasing back to 4% from 1 July 2021) you would be better off to transfer the TSB maximum into pension phase as soon as possible.

Between ages 65-74 the minimum pension amount increases to 5% (currently 2.5% until 1 July 2021 due to Covid-19), so it would be more difficult to be certain that your SMSF returns will exceed the CPI (and hence the TSB uplift) after the minimum pension has been paid out each year. That will depend on your SMSF asset allocation and resulting performance (which in turn will depend on you risk tolerance).

In my case I expect our SMSF to achieve investment returns of around 8.5% - 10% pa, to it will be best to transfer the TBC amount of my SMSF balance into pension phase as soon as I reach 65 (if I'm still working and  not 'retired') - that is assuming my super exceeds the relevant TBC by that time. If I 'retire' before I hit 65 I will be able to transfer up to the TBC amount into pension phase (and hence pay 0% rather than 15% tax on the relevant SMSF pension account's income) - but I am unlikely to reach the TBC much before I reach 65 (but of course that will depend on the investment performance of our SMSF, and if I make any undeducted contributions to 'top up' my superannuation before I hit the TSB.

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