Is it possible to commence a pension with a balance greater than $1.9m? Yes and No!
Generally pensions cannot be commenced if the initial pension account balance is greater than $1.9m (the current transfer balance cap which applies from 1 July 2023). However, what if:
1. The pension is a transition to retirement pension?
2. The member has a negative transfer balance account before the pension commenced?
In these two circumstances the pension can be commenced with an initial account balance greater than $1.9m.
1. The pension is a transition to retirement pension
As these pensions do not receive the earnings tax exemption the transfer balance account rules do not apply and so the transfer balance cap is not relevant. Consequently, it is possible to commence a transition to retirement pension with an account balance of say, $2.5m. But why do so if the earnings tax exemption does not apply?
The primary benefit is to access the pension account when the pension account is still preserved. It is possible to access, from a preserved account of $2.5m, from $100,000 to $250,000. If the member has attained age 60 by the time the pension commences, the member can access between $100,000 to $250,000 tax free pension payments. The minimum and maximum amounts are from the requirement that a transition to retirement pension must still satisfy the minimum drawdown requirement and is subject to a pension payment ceiling of 10% of the initial pension balance (and thereafter the 10% ceiling is based upon the pension account balance at the start of each subsequent financial year).
Once the member attains age 65 (retires for super purposes before age 65) then the transition to retirement pension will be entitled to the earnings tax exemption. This means the transfer balance account rules applies and the transfer balance cap then applying (let’s assume it is still $1.9m) will apply to the pension. This may result in the pension having an excess transfer amount and the pension will have to be partially rolled back or cashed out to remove the excess amount.
2. The member has a negative transfer balance account before the pension commenced
This situation, commencing a pension when the member has a negative transfer balance account, will arise if the member has previously commenced a retirement phase pension which has exhausted the transfer balance cap space of the member and the member rolls over the pension to another superannuation fund with the current pension account balance.
Consider the following situation: Jane commenced an account-based pension when she attained age 65 on 1 July 2023. The pension balance was $1.9m. This was Jane’s first pension. The commencement of the account-based pension will cause the ATO to open a transfer balance account for Jane and her account-balance will be $1.9m. This will exhaust her transfer balance account cap space.
As Jane has experienced good investment returns and drawdown the minimum pension, after 3 years, her pension account balance is now $2.3m. (Typically, account-based pension balances tend to increase (as the drawdowns do not exceed the earnings growth) but as the minimum drawdowns increase the drawdowns will exceed the earnings growth and the account balance will decline). Jane has decided to rollover her pension to another superannuation fund with the commutation occurring on 30 June 2026 and the new pension issued on 1 July 2026.
Strictly pensions cannot be “rolled over”, this expression is just industry jargon. The pension must first be fully commuted and the lump sum arising from the commutation is then paid to the other superannuation fund as a fund-to-fund contribution (“transfer”). Once the contribution has been received in the new fund, a new pension is commenced for Jane.
For transfer balance account purposes the commutation of the pension will give rise to a transfer balance debit of $2.3m and the commencement of the new pension in the new fund will give rise to transfer balance credit of $2.3m.
Essentially, the transfer balance account for Jane kept by the ATO will be as follows:
If the transfer balance rules did not permit negative balances, it would be impossible to “roll-over” a pension, this would restrict the freedom of superannuation fund members and be economically inefficient as it would mean that a member cannot move their super balances between funds to obtain better returns or more attractive features but would be locked in the super fund which issued their account-based pension.
Additionally, the possibility of negative transfer account balances means that the transfer balance rules operate only as a barrier on the amount of super capital which moves from accumulation to pension phase and not as a limit on the amount of super capital which is in pension phase.
Why not book an appointment with Humble Goode Financial advice team? We can explain everything you need to know in an easy-to-understand language, and we will go through all your options and see what strategy is the right fit for you.
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