Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 263

Managing the pension Transfer Balance Cap

The $1.6 million pension Transfer Balance Cap (TBC) has become a major part of the financial plans of most people with high net worth. Gordon Mackenzie discussed the workings last year in Cuffelinks. The amounts that comprise the TBC, for each individual, are the accumulated total of:

  • the balance in a pension account held as at 1 July 2017, and
  • capital amounts that are transferred in to or out of a pension account after 1 July 2017.

Once the capital value of a pension has been counted, at 1 July 2017 or subsequently on transfer to or from a pension, no account is taken of the future account balance as a result of investment earnings (positive or negative) or pensions (ie income) paid. It only takes account of capital amounts as at 1 July 2017 and on each subsequent transfer to or from the pension account.

If investment income exceeds pensions paid, the account balance can increase beyond the $1.6 million limit and there are no adverse consequences. Similarly, if investment income is negative or does not cover the pension payments made the account balance will reduce. This has been caused by investment returns and income (pension) payments and this does not open a gap for further transfers to a pension if the full $1.6 million has previously been used.

Managing your TBC

So how can you manage your TBC to maximise the benefit of the tax-free status of the pension account?

There is a statutory minimum amount of pension that must be paid from a pension account. Taking this into account suggests that management of your TBC could include:

  • Increasing the investment return of your pension account by investing it for the longer term using growth assets such as shares and property while investing more defensive assets such as cash and fixed interest outside the pension account either in accumulation accounts within superannuation or outside superannuation. You will need to be careful of any tax implications that might arise.
  • Keeping the income (i.e. pension) paid from the pension account to the statutory minimum. If you need more income or lump sum amounts, these should, to the extent possible, be taken from moneys held outside superannuation or held within superannuation in accumulation accounts. This will maximise the pension account benefitting from its tax-free status.
  • If you do need extra amounts, whether as income or lump sums, and these need to be taken from the pension account, do this as a commutation (or lump sum) rather than increased pension (income). If you are over 60, payments will be tax-free in either case. Income and lump sum (commutations) are treated differently under the means test for the Age Pension but this is unlikely to be an issue if you are concerned about the TBC. Lump sum (commutation) amounts come off your TBC account.

Future changes

Even if you are satisfied that you have accommodated the TBC for now, this may change in future. You may need extra room within your TBC in the future if you ever have extra superannuation amounts which could arise from:

  • Contributions made while you are under age 65.
  • Contributions made if you are between 65 and 75 and return to work.
  • A contribution made following the sale of your principal residence after 1 July 2018. Contributions of up to $300,000 per person will be allowed if you are over age 65.
  • A death benefit superannuation pension received on the death of a partner.

The superannuation rules become increasingly complex, but it's worth understanding the major rules to maximise the benefits of the tax-free status.

 

Graham Horrocks is an actuary specialising in financial planning and superannuation, and a former General Manager, Research & Quality Assurance, with Ord Minnett. Since 1999, he has been an independent financial adviser. This article is educational and does not consider the circumstances of any investor.

  •   19 July 2018
  • 12
  •      
  •   
12 Comments
Gavin Roberts
July 19, 2018

I thought you are unable to segregate assets (and therefore their earnings) when the $1.6m TBC applied, ie. you needed to use the proportionate approach for the allocation of income across pension and accumulation balances.

Liam
July 23, 2018

To help clarify the strategy of segregating your investments I would mention that more defensive assets such as cash and fixed interest could only be segregated in a SMSF if both members are under the TSB limit of $1.6m. If one/both of the members is above the $1.6m TSB (across all Superannuation accounts inside and outside of the SMSF) then the option would be to to have a separate accumulation account within a retail / industry superannuation fund or keep those investments outside superannuation in personal names or a family trust.

The other option is a second SMSF but the ATO is frowning on that idea and you would need a good argument to sustain the 2 SMSF strategy like other younger members in accumulation so wanting to keep all accumulation funds invested in a similar investment strategy.

Important to understand it is the $1.6m TSB that causes the restriction, not the TBC

Dean
July 19, 2018

One item that was not covered is the effective use of the provisions to increase the $1.6M TBC by government under the current regulations. It makes sense, where possible, to defer some decisons to after the first increase which is several years away. The increase will be based on CPI and be in increments of $100,000.

Has anyone calculated the effective date of the increase to $1.7M?

peter
July 19, 2018

Dean, that very much depends on the CPI, which can go up and down year on year. The Reserve Bank is targeting CPI of about 2.5% per year. If we get this inflation rate consistently it should reach $1.7 million in 2020. A consistent rate of inflation 2.0% will mean 2021. Of course we all know inflation is not consistent year on year.

James N
July 19, 2018

Great article, Graham!

I am surprised how little consideration is given by most to matching asset return profiles to ownership structures.

As a further example, holding low-income/high-growth assets like a US share ETF outside of Super, with the high-income/moderate-growth assets like an AUS share ETF inside of Super.

This type of approach allows you to control the timing of most of the taxable element of returns from the US ETF by choosing when to realise gains, and make use of the refund of excess franking credits available to the AUS ETF inside of super. Similar in concept to what you're describing.


Thanks for putting your thoughts out to the Cuffelinks readership!

Geoff F
July 19, 2018

Hi James N,

Re your comment “and make use of the refund of excess franking credits available to the AUS ETF inside of super” ...

It may be appropriate/necessary to factor in Labor’s policy of not refunding “excess franking credits”, as it would impact your suggested approach.

James N
July 22, 2018

Hi Geoff F,

Yes, it certainly could. It would diminish the value of the strategy, but it would still be beneficial holding those assets within super environment compared to personally/via family trust.

Good discussion, as always.

John De Ravin
July 19, 2018

I have the same query as Gavin Roberts. Graham can you please clarify your comment about asset allocation as between the pension account and the accumulation account where the total exceeds the TBC? At least in an SMSF I don’t believe segregation is permissible.

Vicki C
July 23, 2018

My understanding is that you can segregate for asset allocation purposes, but not for tax. So a member with over $1.6m of superannuation balance could have mainly growth assets in pension phase, and some other type of asset in accumulation phase. Only the ECPI calculation will treat them as not segregated.

Liam
July 23, 2018

Just repeating my above comment for John. To help clarify the strategy of segregating your investments I would mention that more defensive assets such as cash and fixed interest could only be segregated in a SMSF if both members are under the TSB limit of $1.6m. If one/both of the members is above the $1.6m TSB (across all Superannuation accounts inside and outside of the SMSF) then the option would be to to have a separate accumulation account within a retail / industry superannuation fund or keep those investments outside superannuation in personal names or a family trust.

The other option is a second SMSF but the ATO is frowning on that idea and you would need a good argument to sustain the 2 SMSF strategy like other younger members in accumulation so wanting to keep all accumulation funds invested in a similar investment strategy.

Peter H Hughes
July 24, 2018

I was under the impression that if the $1.6m was exceeded in a SMSF -say $2M, the total income of the pooled investment would be treated proportionately ie assume total income of $120,000 - 80% would be tax free = $96,000 and the remaining 20% in 'Accumulation ' phase would $24,000 taxed at 15% = $3,600 I could live with that!

Graham Horrocks
July 27, 2018

Yes, for calculating tax a SMSF (or a small APRA fund) must now use the proportional method for unsegregated assets (rather than use the method for segregated assets) if any member is receiving a pension and has total superannuation benefits in all funds exceeding $1.6 million. Splitting some of the superannuation benefit into another, perhaps non-SMSF superannuation fund, should allow different asset allocations to be used.

 

Leave a Comment:

RELATED ARTICLES

Did retirees lose out when they accepted defined benefit schemes?

How to prevent excessive superannuation balances

How to shift into pension mode

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

Latest Updates

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Superannuation

The Division 296 tax is still a quasi-wealth tax

The latest draft legislation may be an improvement but it still has the whiff of a wealth tax about it. The question remains whether a golden opportunity for simpler and fairer super tax reform has been missed.

Superannuation

Is it really ‘your’ super fund?

Your super isn’t a bank account you own; it’s a trust you merely benefit from. So why would the Division 296 tax you personally on assets, income and gains you legally don’t own?

Shares

Inflation is the biggest destroyer of wealth

Inflation consistently undermines wealth, even in low-inflation environments. Whether or not it returns to target, investors must protect portfolios from its compounding impact on future living standards.

Shares

Picking the next sector winner

Global equity markets have experienced stellar returns in 2024 and 2025 led, in large part, by the boom in AI. Which sector could be the next star in global markets? This names three future winners.

Infrastructure

What investors should expect when investing in infrastructure: yield

The case for listed infrastructure is built on stable earnings and cash flows, which have sustained 4% dividend yields across cycles and supported consistent, inflation-linked long-term returns.

Investment strategies

Valuing AI: Extreme bubble, new golden era, or both

The US stock market sits in prolonged bubble territory, driven by AI enthusiasm. History suggests eventual mean reversion, reminding investors to weigh potential risks against current market optimism.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.