When you retire, like most Australians, you’ll probably transfer your super into a pension account to start your retirement income stream.

But did you know there’s a limit to how much super you can transfer?

It’s called the Transfer Balance Cap and in this article, I’ll explain how the transfer balance cap works, what counts toward it, and the consequences if you exceed it

What is the Super Transfer Balance Cap?

The Transfer Balance Cap (TBC) is a lifetime limit on the total amount of superannuation that can be transferred into tax-free retirement phase income streams such as an account-based pension, defined benefit pension or annuity.

This limit is currently set at $2 million for the 2025-26 financial year and is indexed in line with inflation.

Why is there a Transfer Balance Cap?

To understand why there is a transfer balance cap (TBC), it’s essential to first distinguish between the two phases of superannuation: Accumulation phase and retirement phase.

Accumulation phase

Accumulation phase is where your superannuation balance is held while you are working. Contributions are made to an accumulation account by you and your employer. However, even when you stop working, you can leave your funds in an accumulation account.

Accumulation Phase also extends to any balance held within a transition to retirement income stream (TRIS). Although a TRIS provides an income, it is not considered part of the Retirement Phase until it automatically converts when you reach age 65 or satisfy the superannuation definition of retirement.

Additionally, defined benefit superannuation schemes, such as Public Sector Superannuation (PSS) or Commonwealth Superannuation Corporation (CSC) schemes, are part of the accumulation phase.

So if that’s accumulation phase, what is retirement phase?

Retirement phase

Retirement Phase begins when you transfer some or all of your superannuation balance from the Accumulation Phase to a retirement income stream like an account-based pension, defined benefit pension or annuity – excluding a Transition to Retirement Income Stream, as previously mentioned.

To be able to make the transfer funds to the retirement phase, you must meet specific eligibility criteria, such as reaching age 65 or retiring after turning 60.

Once transferred, the full balance of the income stream is considered part of Retirement Phase.

It’s also worth noting that you can maintain funds in both the Accumulation Phase and the Retirement Phase simultaneously.

So why would you Transfer Your Super Into Retirement Phase?

Having funds in the Retirement Phase can provide you with regular income payments that can assist in covering your living expenses now that you have stopped working – like a replacement of your salary.

But that’s not all – there’s another significant advantage: all investment earnings in the Retirement Phase are entirely tax-free.

This differs from Accumulation Phase, where earnings are taxed at 15%.

This tax advantage explains the introduction of the transfer balance cap – it restricts the tax benefits accessible to high-net-worth individuals by capping the amount held in the tax-free Retirement Phase.

To make the most of these benefits, understanding what does and doesn’t count towards the TBC is crucial.

What counts towards the Transfer Balance Cap?

As mentioned, the Transfer Balance Cap (TBC) for the 2025–26 financial year is set at $2 million. The following amounts count towards your transfer balance cap:

Account based pensions

Any amount transferred into an account-based pension will count towards your transfer balance cap.

Superannuation lifetime annuities

The amount of your superannuation directly used to commence an annuity will count towards your transfer balance cap.

Defined benefit pension

To calculate the amount of a defined benefit pension that counts towards the transfer balance cap, you need to calculate the special value of your defined benefit pension. The special value of a defined benefit pension is calculated as the daily pension amount, multiplied by 365, then multiplied by 16. The factor of 16 used a standardised multiplier set by the government

For example, if your defined benefit pension is $2,600 per fortnight, you divide this amount by 14 to calculate the daily amount. Then, multiply the daily amount by 365 to determine the annual amount. Finally, multiply the annual amount by 16 to calculate the lifetime amount. In this case, the total would be $1,084,571

Life expectancy or market-linked pensions

The special value of these types of income streams is calculated as your annual pension payments multiplied by the number of years remaining for the pension, rounded up.

What if you have a combination of pensions?

If you have a combination of pensions, your Transfer Balance Cap is the sum of their values.

For example, if you receive a defined benefit pension of $2,600 per fortnight, its special value is calculated as $1,084,571 ($2600/14 days x 365 days x 16). Additionally, if you have an accumulation account of $500,000 and use the total balance to start an account-based pension, the total amount counted toward your TBC would be $1,584,571.

Understanding what counts towards your Transfer Balance Cap is essential for effectively managing your retirement income.

In addition to this, it’s important to know how credits and debits work in relation to your transfer balance cap.

How do transfer balance cap credits and debits work?

Every individual starts with a Transfer Balance Account equal to the transfer balance cap of $2 million.

Credits are added to your Transfer Balance Account when funds are transferred into account-based pensions, superannuation annuities, or defined benefit pensions.

Debits occur when pensions are commuted – or transferred – back into accumulation accounts.

Importantly, investment earnings and pension payments do not impact the credit or debit balance of your TBA.

For example, if you started an account-based pension with $1.2 million, a credit of $1.2 million would be applied to your Transfer Balance Account. If the balance then grew to $1.3 million that extra $100,000 you made through investments does not count towards the cap.

So If you rolled back $300,000 to an accumulation account, your Transfer Balance Account would be $900,000. $1.2m (the amount you transferred in) – $300,000).

How can you keep track of all this and determine how much of your Transfer Balance Cap you’ve used?

Where can I find my transfer balance account?

The Transfer Balance Cap is monitored by the Australian Taxation Office, and reported through your MyGov account to help you stay within the cap.

To see where your Transfer Balance Account currently stands, sign into your MyGov account, select the Australian Tax Office, and follow the path: Super > Information > Transfer Balance Cap.

Here you will find your transfer balance cap.

In addition to the ATO monitoring your Transfer Balance Cap, super funds also assist in ensuring you keep within the limits.

For example, if you have started an account-based pension, super funds help members comply with their transfer balance cap by monitoring transfers into your pension account.

Transfers are capped at each member’s personal transfer balance cap limit, with any excess remaining in accumulation accounts.

Despite these safeguards, exceeding the Transfer Balance Cap can still happen, particularly if you have multiple accounts across different super funds or a more complex financial situation.

What happens if you exceed the transfer balance cap?

When you exceed the Transfer Balance Cap with different types of retirement income streams, the consequences vary depending on the type of pension. Here’s what happens for each:

With an account-based pension If you exceed the Transfer Balance Cap, you must commute the excess account-based pension balance, including notional earnings, to bring your balance back under the cap.

You’ll also be required to pay a 15% tax on notional earnings related to the excess amount, increasing to 30% for subsequent breaches.

For defined benefit pensions and annuities, it’s different. Generally, funds in annuities and defined benefit pensions cannot be commuted or rolled back if they exceed the TBC.

Instead, You will need to pay additional taxation of the excess.

50% of the annual excess is added to assessable income and taxed at the marginal rate

For mixed pension scenarios: If you have both account-based and defined benefit pensions, and the combined total exceeds your transfer balance cap, you’ll need to reduce the excess using your account-based pension.

You’ll also be required to pay a 15% tax on notional earnings

For all the scenarios, if you exceed the transfer balance cap, The Australian Tax Office will issue an excess transfer balance determination, detailing the amount you exceeded the cap by and the associated notional earnings.

Once the excess is removed, the ATO will send a notice of assessment specifying the excess transfer balance tax you owe.

Transfer balance cap strategy

Managing your Transfer Balance Cap is critical for optimising your retirement strategy and avoiding unnecessary tax implications.

This is where we can help.

At Toro Wealth, we specialise solely in retirement planning advice. We aim to give you confidence about when you can retire, the retirement income you can achieve and how to optimise your financial position in the lead-up to retirement.

To learn more about our services and fees, click here, click here.