Cash Balance Pension Plan: The 2025 Guide for Australians

As Australians rethink their retirement strategies in 2025, cash balance pension plans are emerging as a smart, flexible alternative to traditional superannuation. While long-established in the US, these plans are now gaining traction among Australian professionals, business owners, and high-income earners seeking both security and adaptability in their retirement savings.

What is a Cash Balance Pension Plan?

A cash balance pension plan is a hybrid retirement scheme combining features of defined benefit and defined contribution plans. Unlike traditional super funds where retirement income depends solely on investment performance, cash balance plans offer a guaranteed, formula-based benefit—while still allowing for individual account growth and portability.

• Defined benefit component: Your benefit grows with a set formula, typically based on your salary and years of service, but is expressed as a notional account balance.

• Portability: Employees can transfer or roll over their benefit if they change jobs.

• Employer contributions: Typically higher and more predictable than standard superannuation guarantee payments.

For example, a medical practice might set up a cash balance plan for its owners and senior staff, allowing them to contribute well above the usual concessional cap, subject to age and income limits.

Policy Updates in 2025: What’s New?

The 2025 Federal Budget introduced several tweaks affecting cash balance-style pension plans and high-balance superannuation strategies:

• Contribution caps: The annual concessional cap remains at $30,000, but cash balance plans can operate within a self-managed super fund (SMSF) structure, enabling larger, actuarially certified contributions for eligible members.

• Division 293 tax threshold: Remains at $250,000, impacting high-income earners who contribute to these plans.

• Transfer balance cap: Indexation has lifted the general transfer balance cap to $1.98 million, giving retirees more room to move their cash balance benefit into a tax-free retirement phase.

• Focus on transparency: APRA and the ATO are stepping up scrutiny of non-standard pension arrangements, so proper structuring and compliance are crucial.

Accountants and financial advisers are increasingly recommending these plans to business owners seeking both tax effectiveness and asset protection, especially as the rules for legacy defined benefit pensions tighten.

Benefits and Risks: Who Should Consider a Cash Balance Pension?

Cash balance pension plans are best suited to self-employed professionals, SME owners, and those with variable income who want to maximise retirement savings beyond standard super contributions. Key advantages include:

• Higher contribution limits: Especially valuable for late-career catch-up.

• Predictable retirement benefits: Reduces investment risk compared to market-linked pensions.

• Tax efficiency: Contributions are usually tax-deductible to the business, and growth is taxed within the super environment at 15%.

• Estate planning: Unused balances can be paid out to beneficiaries, often more flexibly than with standard defined benefit pensions.

However, these plans aren’t for everyone. They require actuarial certification, ongoing compliance, and are best suited to those with steady business income and a long-term commitment to funding the plan. A poorly structured plan can trigger excess contribution tax, Division 293 tax, or run afoul of ATO anti-avoidance rules.

Real-World Example: How a Cash Balance Plan Works in Practice

Consider Dr. Smith, a 52-year-old dentist in Sydney with her own practice. She wants to ramp up her retirement savings over the next decade. By establishing a cash balance plan within her SMSF, she can contribute up to $100,000 per year (based on an actuary’s calculation), well above the concessional cap. Her business claims a tax deduction, her retirement benefit grows predictably, and she can still access the usual superannuation investment options.

With careful structuring, Dr. Smith’s cash balance pension delivers both security and flexibility—helping her retire on her own terms, even as legislative settings evolve.