Australians planning their retirement know that the superannuation system is full of moving parts, and one of the most important is the transfer balance cap. With the 2025 indexation update now in effect, understanding the new limits and how they affect your retirement income stream is essential for anyone relying on their superannuation pension.
What Is the Transfer Balance Cap?
The transfer balance cap is a limit on the amount of superannuation that can be transferred into the tax-free retirement phase, known as an account-based pension. Anything above this cap must remain in accumulation phase, where earnings are taxed at 15%. The cap was first introduced in July 2017 to help keep the super system sustainable and equitable, preventing wealthy individuals from amassing excessively large tax-free pensions.
Here’s why it matters:
- Tax-Free Earnings: Money in a retirement-phase pension account earns tax-free returns, so the cap directly limits how much of your super can enjoy this benefit.
- Excess Transfer Balance Tax: Exceed the cap, and you’ll face a penalty tax and be required to move the excess back into accumulation phase or withdraw it altogether.
- Personal Cap: Your personal cap may be lower than the general cap if you started a pension before 2025. The ATO tracks your usage with a transfer balance account.
2025 Transfer Balance Cap Changes
From 1 July 2025, the general transfer balance cap is indexed to $1.95 million, up from $1.9 million. This increase follows the annual indexation linked to inflation, providing retirees a little more flexibility in managing their retirement savings.
Key points for 2025:
- New Cap: $1.95 million per person for the retirement phase of super.
- Partial Indexation: If you’ve already used some of your cap, your personal cap will increase proportionally, not automatically to the full $1.95 million.
- Impacts Pension Commencements: Starting a new pension after July 2025? The new cap applies, but be mindful if you previously started a pension—your cap might be less.
- Defined Benefit Pensions: Special rules apply to defined benefit pensions, with commutation values calculated differently for cap purposes.
For example, if you started a pension with $1.6 million in 2017 and haven’t added more, your personal cap will rise, but not all the way to $1.95 million. The ATO will calculate your new cap based on your highest ever transfer balance, so check your MyGov or ATO portal for your personal details.
How the Cap Affects Your Retirement Strategy
Understanding the transfer balance cap is crucial for maximising your super’s potential and avoiding costly mistakes. Here’s how it might influence your decisions in 2025:
- Timing Pension Commencement: If you’re close to retirement, the July 2025 increase could let you transfer more into the tax-free phase if you delay starting your pension.
- Managing Excess Amounts: If you exceed your cap, the ATO will issue a determination and you’ll need to remove the excess. Excess transfer balance earnings are taxed at 15% for the first breach and 30% for subsequent breaches.
- Estate Planning: The cap can affect how much you can leave to beneficiaries in the tax-free pension phase, so it’s worth reviewing your plans.
Real-world example: Jane, 66, started her account-based pension in 2022 with $1.7 million (using the cap at the time). With the cap rising to $1.95 million in 2025, her personal cap will increase, but not to the full $1.95 million. She can top up her pension, but only by the indexed amount available to her, not the whole difference.
Practical Steps for 2025
- Check your personal transfer balance cap with the ATO, especially if you’ve started a pension before 2025.
- Consider the timing of starting or topping up a pension to maximise your tax-free super benefits.
- Work with your super fund or adviser to ensure you don’t inadvertently breach the new cap, especially if you receive large contributions or inheritances.
- Stay up to date with annual indexation to ensure your retirement planning remains on track.
Conclusion
The 2025 transfer balance cap update is good news for retirees looking to boost their tax-free super income. But the rules around personal caps and excess transfers make it essential to keep a close eye on your super strategy. Whether you’re about to start a pension or already drawing an income, understanding your cap is key to making the most of your retirement nest egg.
