Understanding the Transfer Balance Cap and Non-Concessional Contributions
Retirement savings can be a maze of numbers, but one number, $1.9 million, stands out as particularly important. This number plays a key role in determining how much you can put into your superannuation fund, and knowing its ins and outs can help you maximise your savings.
The $1.9 million figure represents the current transfer balance cap, which is essentially the maximum amount of money you can transfer into a pension when you retire.
For those starting their first pension in the 2023-24 financial year, this cap sits at $1.9 million.
The general Transfer Balance Cap serves several purposes:
- It is the maximum amount a super fund member can transfer to the pension phase for the first time,
- It determines eligibility to receive the Government co-contribution and the spouse tax offset, and
- It sets the parameters for enabling a person to make non-concessional contributions and access the three-year bring forward cap.
This cap increases in increments of $100,000 in line with inflation. However, it won’t increase for everyone at the same time. If you've already maxed out your cap by starting a pension at $1.9 million, any future increases won't apply to you. This cap only limits the initial amount you can put into a pension, not how much it can grow over time.
It’s important to note that you can't bypass this cap by starting multiple pensions. The Australian Taxation Office (ATO) keeps track of all pension commencements and ensures compliance with the cap.
Additionally, if you've used up your cap but later decide to withdraw a significant amount from your pension for other purposes, you may consider treating it as a "commutation." Reporting this to the ATO reduces the amount counted towards your cap, potentially allowing for future contributions.
Aside from pensions, the $1.9 million figure also affects non-concessional contributions, which are contributions made from personal funds without claiming a tax deduction. If your super balance exceeds $1.9 million at the end of a financial year, you may face restrictions on making non-concessional contributions in the following year. However, those with balances below $1.9 million can usually contribute up to $110,000 annually.
Interestingly, everyone is treated the same regarding non-concessional contributions, regardless of their individual pension cap. This means even if your personal cap is lower than $1.9 million due to historical reasons, your ability to contribute is assessed against the general cap.
As time goes on and contribution rules allow for longer periods of contributions, retirees may find themselves in a situation where their super balance exceeds their personal cap but remains below the general cap. This could allow for additional contributions despite having surpassed their personal limit.
Reference/more reading: ATO website