Don't start a new Account Based Pension before July 1st June 16th, 2023
Retirees who are about to start an Account Based Pension (ABP) in the next two weeks should hold fire. Going now could mean that you miss out on accessing up to $200,000 in tax-free savings.
The Transfer Balance Cap and Tax Benefits
The Transfer Balance Cap (TBC) plays a crucial role in determining the tax benefits of an Account Based Pension. The TBC sets a maximum limit on the amount that can be transferred from the superannuation accumulation phase to the retirement phase.
Superannuation funds held in the retirement phase, such as an Account Based Pension, are completely tax-free. In contrast, funds in the accumulation phase are subject to taxes on earnings and capital gains.
The Increase in Transfer Balance Cap
Currently set at $1.7 million, the Transfer Balance Cap is set to increase to $1.9 million on July 1 (we’ll explain why this could affect you at some point in the future, even if you’re well below this cap).
This increase is significant as it provides an opportunity for retirees to access additional tax-free savings. However, the timing of when an Account Based Pension is started becomes crucial.
Implications of Deferring an Account-Based Pension
Once an income stream is initiated, the Transfer Balance Cap is set for life.
This means that individuals who have already started an income stream before the cap increase will not benefit from the increase.
However, those who haven't started an income stream or haven't utilised the full amount of their Transfer Balance Cap can benefit from the increased cap.
Future Financial Flexibility and Potential Windfalls
Considering future financial flexibility is essential, even if you have lower super balances currently.
Unexpected windfalls, such as inheritances, property sales, or cash injections, might require additional contributions to super for tax or financial planning purposes. Waiting a couple of weeks to set up an Account Based Pension can potentially provide access to the extra $200,000 in tax-free savings, offering a useful buffer and greater financial flexibility in the future.
Don’t Set Up a New Account Based Pension Before July 1st
Given the impact of the Transfer Balance Cap increase and the potential tax benefits, it is most likely best to defer the decision and start an Account-Based Pension after July 1.
By doing so, you can take advantage of the higher cap and maximise your tax-free savings. Making an informed decision now can have a significant impact on your retirement income and financial well-being in the years to come.