What does the Indexation of the transfer balance cap mean for you?

According to CPI figures released in December it looks likely the Transfer Balance Cap will index to $1.9 million on 1 July 2023. The amount of this next increase is quite unusual as the normal increment is $100,000. However, it is understandable given the high inflationary conditions we are all experiencing.

The $1.9 million will be the new cap that retirees must consider when looking at commencing retirement incomes. Pension balances must be within this cap for the pension account to receive exempt income.

So $200,000 indexation of the transfer balance cap won’t be available to everyone, however.

  • If a person had previously used 100% of their cap when it was $1.6 million or $1.7 million, then this latest increase will not apply.
  • A person who had previously triggered their cap by commencing a retirement pension will not benefit from the full $200,000 indexation. Any increase will be in proportion to what their outstanding personal cap is. In other words, if a person has not used all their transfer balance cap prior to 1 July 2023 then only a proportion of the $200,000 increase will apply. The level of indexation will depend on the person’s highest ever balance.

For retirees who have not yet triggered any of their cap the good news is they will enjoy the full benefit of the indexation from 1 July 2023.

Suffice to say, the indexation of the transfer balance cap brings further challenges to the already complicated structure of this cap. Best of luck to the Australian Tax Office who has the job of monitoring everyone’s personal cap.

Advisers and their clients will up to 30 June, no doubt, be discussing whether to commence new retirement income streams or wait until the indexation occurs after 1 July, to get the full benefit of the $200,000 increase or part thereof. There will be advantages and disadvantages either way so as always, best to explore both options before deciding.

Also bear in mind, as a result of the increase to the transfer balance cap that other cap –Total Super Balance – will also increase to $1.9 million. This may benefit clients looking at making non-concessional contributions into super and who may currently be ineligible due to their position last 30 June 2022.

Now, just to complicate things even further the contribution caps index in line with Average Weekly Ordinary Times Earnings – or AWOTE – and not CPI. The AWOTE data just released confirms the contribution caps will remain as is from 1 July 2023. They will not index.

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As always, we recommend our clients speak to their Morgans adviser to ensure they understand how these changes may reflect on their own personal circumstances.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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According to CPI figures released in December it looks likely the Transfer Balance Cap will index to $1.9 million on 1 July 2023.
Find out more