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Five ways to maximise new tax break to boost retirement income
Retirees and those nearing retirement with $1.9 million in super can boost their pension account by an extra $100,000 to $2 million when the limit is lifted from July 1, providing an opportunity to increase income and improve financial security.
Those with $1.76 million in their income account can increase contributions by an additional $360,000 by maximising the bring-forward rules under the new caps, according to financial advisers.
But the super system is complex – and currently under threat of renewed changes – so advisers recommend consider reviewing strategies to make the most of the changes, particularly where it affects other strategies such as estate planning.
Kreston Leggett, associate director for Arrow Private Wealth, says: “The increase affects other superannuation thresholds, such as eligibility to make contributions, tax offsets and receive co-contributions.”
The Total Balance Cap (TBC) is a lifetime limit on how much super can be transferred into one or more tax-free retirement pension plans in an industry, retail or self-managed super fund (SMSF). Members in the latter each have their own TBC.
The cap is being adjusted in line with inflation, the fourth time it has been increased since 2017 when it was $1.6 million.
Optimising a retirement stream
What follows are tips from financial specialists on how to optimise a retirement stream and avoid potential pitfalls.
Those who have not started drawing a retirement income, or who are coming up to retirement, should consider delaying until after July 1. That enables them being able to make the most of the new cap and transferring $2 million into a tax-free account.
Retirees with a retirement pension can still benefit. The TBC is based on proportional indexation based on the highest-ever transfer balance. Those that have not fully used their cap may be entitled to a partial increase. It is possible to review your TBC account and available cap space on the ATO’s myGov portal.
But Leggett warns there is sometimes a lag between the fund reporting and data on the portal, particularly for SMSFs that report less frequently than an industry or retail fund.
Liam Shorte, principal of financial advisory and SMSF specialist Sonas Wealth, says: “If you start your retirement phase income stream on or after July 1, 2025, your personal TBC will be set at $2 million.
“But if you began your income stream before July 1, your personal TBC would range anywhere from $1.6 million to $1.9 million, depending on the specific year you started your first pension. A proportional increase may apply to those who have not used the full amount of their personal TBC.”
There is the option to split concessional contributions with a qualifying spouse who is either a marriage partner, in a registered relationship or a de facto relationship. “This strategy is particularly attractive where a non-working spouse has a significantly lower super balance,” says Leggett.
The split can keep both partners under their respective TBCs, which can maximise tax-free income streams and potentially increase eligibility for government benefits.
Remember, the increased TBC may impact your estate planning. With more funds in the tax-free retirement phase, it is a smart time to review beneficiary nominations and consider strategies like re-contribution to optimise tax outcomes for your heirs.
Ensure you maximise non-concessional contributions (contributions made to a super account with after-tax dollars). Those with a Total Superannuation Balance (TSB) below $1.76 million can contribute up to $360,000 using the three-year bring-forward rule. [The annual concessional contribution cap of $30,000 and non-concessional contribution cap of $120,000 are not increasing.]
Shorte adds: “Those who exceed their personal TBC must remove the excess from their income stream and either take it in cash or transfer it back into their superannuation account.”
The ATO will notify where the cap has been exceeded, and it will have to be repaid into an accumulation account.
