Nick Bruining: Deferring your retirement could earn you extra dollars thanks to transfer balance caps

Those likely to retire with sizeable super fund balances in the near future have been urged to consider deferring retirement until July next year.

A six-figure increase in the amount that can be moved into tax-free pensions might be lost if you start a pension in the next nine months.

The transfer balance cap is the maximum amount a person can move into retirement phase once they reach a condition of release — typically retirement.

Significantly, no tax is payable on superannuation fund earnings in retirement phase. In accumulation phase, the investment earnings are taxed at 15 per cent.

Because the tax-free arrangement is so generous, there’s a limit of $1.9 million per person. That figure is indexed in $100,000 increments, linked to the consumer price index.

Colonial First State technical services manager Craig Day told Your Money a $100,000 increase in the TBC was almost certain.

“Following the release of the June quarter CPI figure, it is likely to rise from $1.9m to $2m,” he said.

“While indexation is actually based on the December quarter figures, the increase in the June quarter was high enough.

“The only thing that would change that is if we see deflation of more than one per cent in the next few months. But that’s unlikely.”

Independent financial planner Sandra Carr said while the increased TBC was a significant factor to be considered, the extra tax paid while waiting for July 1 should also be factored in.

“If you left $1.9m in accumulation phase earning 7 per cent pre-tax for the next 10 months, the tax payable by the fund would be more than $16,000,” she said.

“Converting to a pension now means you save that tax.

“But if the plan is to retire sometime next year, waiting a few weeks and getting an extra $100,000 added to your TBC makes sense.”

Even couples with smaller balances should be aware of the rules.

“In many cases, the death of a partner sees the deceased’s superannuation fund transferred to the surviving partner. The additional funds can raise TBC issues if the total of the two funds puts you over the limit,” Ms Carr said.

Similarly, the ability to make significant additional contributions might also arise.

That could be through a windfall such as an inheritance or by using the super down-sizer contribution rules.

Super downsizing allows each person to invest $300,000 from the proceeds of their home sale into super, and non-concessional super contributions can be as much as $360,000 per person.

Having an extra $100,000 added to the TBC will provide you with more options.

Once you start a retirement phase account, the TBC is locked for life, so those who started retirement earlier won’t have access to the extra $100,000.

But those currently involved in a transition-to-retirement strategy don’t need to worry because transition-to-retirement pensions aren’t in retirement phase and, therefore, don’t fix the TBC amount.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association