My super has reached $2m, can I dodge the transfer balance cap?

I am 60 but plan to continue working until 64. My super has performed far better than I anticipated, and the balance is now well over $2 million. I have read that a transition to retirement (TTR) pension is not subject to the transfer balance cap. In a year or two, I will start a TTR pension using the amount over the transfer balance cap (potentially about $300,000-$400,000 by then) and then draw that down until I eventually retire fully. Can I do this, or am I misinterpreting something? It would seem to be a simple way around the transfer balance cap issue.

The transfer balance cap (TBC) is a lifetime limit on the amount a person can move from super accumulation phase (where earnings are taxed at up to 15 per cent) to a retirement phase pension (where earnings are tax-free). TTR pensions are not subject to the cap, as earnings within a TTR pension are taxed the same way as super accumulation.

Try as you might, it can be hard to avoid being taxed on your excess super.Credit: Simon Letch

You can start a TTR pension now that you have reached your preservation age. However, it will not help with saving tax on the earnings. Note also that you can only access up to 10 per cent of the balance of a TTR pension each year as pension payments.

When you stop working, you may consider commencing a retirement phase pension up to the TBC limit, which will rise to $2 million on July 1 and may be further indexed by the time you retire. Any excess balance could be retained in accumulation phase as there is no compulsion to remove it from the superannuation environment.

There has been much publicity about a proposal from the Grattan Institute that retirees be encouraged to put 80 per cent of their superannuation balance above $250,000 into a government annuity. I have heard conflicting views on this and would welcome your comments.

The proposal is deeply flawed. A major reason for this is uncertainty – nobody knows how long they’ll live, how their health will change, or how much an aged care home might cost, especially with the changes introduced late last year.

Take a couple with $750,000 in super. Under the Grattan proposal, they’d be encouraged to put $400,000 – more than half of their savings – into a lifetime income stream. That would leave them with just $350,000 in a lump sum for other needs.

Grattan claims this strategy could boost retirement income by 25 per cent, but their numbers assume retirees only withdraw the bare minimum from an account-based pension. In reality, most retirees take out more when needed, carefully managing their super to balance spending and financial security.

While a lifetime income stream can be useful in some cases, experts generally recommend putting only 20 to 30 per cent of savings into one. Forcing retirees to lock away 80 per cent of their funds above $250,000 is excessive and risky.

We already have a government-guaranteed lifetime annuity: the age pension. Moreover, private providers offer lifetime income streams and time-limited annuities, which are gaining traction to reduce volatility risk for the $4 trillion held in superannuation. We don’t need the government competing with the private sector.

At its core, the Grattan proposition is a push to make retirees convert their lump sums into income streams and use more of their retirement funds. But it’s no surprise many retirees prefer to spend carefully and hold on to a lump sum rather than lock themselves into a product that sacrifices capital for life.

I’m 65 and about to set up a pension account with my super fund. I have about $510,000 in super and plan to transfer $500,000 into a pension account, leaving $10,000 in accumulation as I still do some casual work. I understand that with a 5 per cent minimum pension drawdown, I’ll receive $25,000 per year, which is tax-free. My question is: will this pension income affect the tax treatment of my casual work earnings?

What you say is correct – the pension from your super fund will be tax-free and will not count towards your taxable income.

We are looking at buying an investment property with our self-managed super fund (SMSF). There will be no borrowing. When the fund goes into pension phase, can the ownership of the house pass from super as an in-specie transaction rather than cash?

Any investment decision made by the SMSF must always be in line with the sole purpose of providing retirement benefits.

That said, lump sum withdrawals from super made after a condition of release has been met can be made either in cash or in-specie. This can be an investment property, provided it is done at market value and on an arm’s length basis.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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