Advisers warned on potential TBC ‘freeze’

Speaking in a recent podcast, Colonial First State senior technical analyst Peter Wheatland explained that based on the recent rises in inflation, it now looks very likely that the general transfer balance cap (TBC) will be indexed to $1.8 million from 1 July 2023.

Mr Wheatland noted that in order for the general TBC to be indexed to $1.8 million from next financial year, the All Groups CPI figure for the December quarter would need to reach 123.8 or higher.

“We’ve already gone over that CPI index number in the March quarter of this year, so if there’s deflation between now and December, the general transfer balance cap will be indexed to $1.8 million from next financial year,” he said.

Mr Wheatland reminded advisers that when it comes to the client’s personal TBC, it's only the amount of the cap that they’ve never used before that will receive the indexation. 

“So, if you’ve got clients who are looking to transfer funds into a retirement phase income stream this financial year, and they’re likely to be limited by the transfer balance cap at some point in the future, then you should consider whether it's worthwhile delaying the commencement of the pension until next financial year because that will maximise their personal transfer balance cap indexation,” he suggested. 

“Advisers would of course need to weigh the benefit of delaying [the pension] against the fact that the investment earnings will be subject to tax up to 15 per cent whilst the funds remain an accumulation phase."

Another strategy they may want to consider, he said, is using reversionary nominations rather than binding nominations where appropriate as a reversionary income stream won’t start to count towards the beneficiary’s transfer balance account until after 12 months from the date of death. 

“This will hopefully be after the beneficiary’s personal transfer balance cap has already increased,” he said.

Colonial First State head of technical Services, Craig Day, said while delaying the commencement of the pension till 1 July may provide clients with some extra money that they can move into the tax free retirement phase, they should be mindful of the upcoming Federal Budget. 

“There is a bit of proviso here. We have a Federal Budget on 25 October this year and we’ve got a new government that’s looking for savings so there’s always a risk that the Federal Government could actually freeze indexation of the transfer balance cap,” warned Mr Day. 

“So just keep that in mind, there’s always legislative risk whenever you start to apply strategies about delaying doing things because some sort of threshold will increase in future.

“If the Federal Government says in the Federal Budget that you're not getting that indexation, well, you've potentially just missed out on those tax-free investment returns by delaying the pension, and you never got to take advantage of putting the extra money into super.”