A significant shift in Australian retirement planning is set to take effect on July 1, 2025, with the Transfer Balance Cap (TBC) increasing from $1.9 million to $2 million. Whether you reside in Australia or work overseas, this adjustment presents valuable opportunities to optimize your retirement savings.

Understanding the Change and Its Significance…

The Transfer Balance Cap sets a lifetime limit on the amount you can transfer into a tax-free retirement pension account. In simple terms, it determines how much of your superannuation can enjoy tax-free earnings in retirement. The upcoming increase to $2 million is intended to keep pace with inflation, ensuring your retirement savings maintain their real value over time.

New Opportunities for Contributions…

A less-discussed impact of this change is its effect on non-concessional (after-tax) contributions. Beginning July 1, 2025, contribution thresholds will shift, allowing greater flexibility for those looking to bolster their super. The new limits are as follows:

• If your total super balance is under $1.76 million, you can contribute up to $360,000 using the three-year bring-forward rule.

• For balances between $1.76 million and $1.88 million, the maximum contribution is $240,000.

• For balances between $1.88 million and $2 million, contributions are capped at $120,000.

For Australian expatriates, these adjustments are particularly advantageous. If you’re earning overseas, particularly in a strong currency, you may be well-positioned to make significant contributions to your Australian super. Timing these contributions strategically, considering exchange rates and the new caps, could maximize your retirement benefits.

Strategic Planning for Different Situations

If you’re approaching retirement, the timing of your pension phase transition is crucial. Starting your pension after July 1, 2025, allows you to transfer up to $2 million into a tax-free environment, rather than the previous $1.9 million cap. This extra $100,000 in the tax-free phase can significantly enhance your long-term retirement income.

If you’re already retired, there’s still potential to benefit. If you haven’t fully utilised your cap, you may be eligible to transfer additional funds into your retirement phase post-July 1, 2025, depending on your individual circumstances.

Looking Ahead

While a $100,000 increase in the Transfer Balance Cap may seem modest, its long-term impact on retirement savings can be significant. For both Australian residents and expats, this change offers fresh opportunities to enhance retirement wealth in a tax-efficient manner.

Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial