The two things you need to know about $1.9m super cap

It can be the most baffling number in retirement savings but figuring it out could help you get more into your fund.

Superannuation is full of thresholds, limits and magic numbers. One of these is $1.9 million. And while it’s relevant because it’s the current transfer balance cap, exactly what it’s used for can still get confusing.

First, let’s look at its role as the general transfer balance cap. We will all eventually have our own personal transfer balance cap. It’s the lifetime limit on the amount anyone can put into a pension in retirement.

For most of us, this will start at the level of the general transfer balance cap as soon as we start receiving our first retirement phase pension. So for someone starting their first pension in 2023-24, it’s $1.9 million.

This limit increases with inflation in $100,000 jumps. The inflation figures just released for December 2023 are the numbers which drive the next increase. It wasn’t high enough to push the general transfer balance cap to $2 million, so it will stay at $1.9 million for 2024-25 as well.

When this eventually does increase to $2 million, it won’t increase for everyone. People who’ve used all their cap before (say by starting a $1.9 million pension now) won’t get any increase. People who’ve used just some of their cap before will get a partial increase.

This is a common question about this cap – what happens if my pension starts at $1.9 million but goes up in value so I’m over the cap at the end of the year? Actually, that doesn’t matter – this is only a cap on what gets put into the pension when it starts, not the size it might grow to over time.

No hiding from the ATO

Another common question is: could I get two of these caps by starting two pensions? Unfortunately, no. The Australian Taxation Office is smarter than that.

All super funds (including SMSFs) have to let the ATO know when anyone starts a retirement phase pension. The ATO then keeps a running tally of how much has been put into pensions overall and compares it to their personal cap. There’s no hiding.

Another interesting fact: sometimes people use all of their cap (by starting a big pension now), and then decide they want to withdraw a large amount from it. This could be to buy a property outside super, help someone financially or even just pay for an expensive holiday.

It can be worth treating at least some of this large payment as a special kind of super benefit known as a “commutation”. When a commutation is reported to the ATO, it knocks this amount off the running tally of how much of your transfer balance cap you’ve used up. (This is not done for pension payments).

This can be useful if you think you might have more super in the future – for example, inheriting a spouse’s super or making extra contributions like “downsizer” contributions when you sell your home.

Non-concessional contributions

So $1.9 million is a very important number when it comes to pensions.

But the same number has also been used when it comes to the super contributions people make from their own money without claiming a tax deduction (non-concessional contributions).

This is where it gets tricky. The simplest case is that someone with $1.9 million or more in super at June 30, 2023, can’t make non-concessional (after-tax) contributions this year without having an excess. In contrast, someone with less than $1.9 million can contribute at least $110,000 this year (unless they’ve already used up this year’s cap with a big contribution in the past two years).

Funnily enough, for this purpose, everyone gets $1.9 million. There are plenty of people who started their pensions years ago when the cap was $1.6 million, and they’ve never received an increase. Their transfer balance cap is still $1.6 million. Perhaps their pension balance is now around $1.7 million. And they may have another $100,000 in their accumulation account.

They know they can’t start any more pensions. But these days they can put more into super (subject to their age – remember people over 75 can’t make these contributions). That’s because the total of all their super accounts is $1.8 million, which is less than the general transfer balance cap ($1.9 million). Like everyone else, their super is tested against the general cap of $1.9 million when it comes to their contributions, even though their personal cap for pensions is much lower.

We’ll see this more and more over time – particularly now that contributions can continue for many years, often well after someone has retired. Their super balance might still be over their personal cap but as the general cap goes up around them, suddenly they will be allowed to put more contributions into super.

Super definitely is a quirky game.

This article was first published in the Australian Financial Review on 14 February 2024.