Transfer Balance Cap 2025: The $2M Limit Explained Simply

The Transfer Balance Cap is one of the most misunderstood rules in Australian superannuation. It limits how much you can move into the tax-free pension phase of super � currently $2.0 million (indexed from the original $1.6 million in 2017). But the real complexity isn't the cap itself. It's how your personal cap changes over time.

What is the Transfer Balance Cap?

The TBC is a lifetime limit on how much superannuation you can transfer into the pension phase. Why does this matter? Because earnings in pension phase are completely tax-free, while earnings in accumulation phase are taxed at 15%.

Before the TBC was introduced in 2017, wealthy Australians could have unlimited amounts in tax-free pension phase. Someone with $10 million in super pension could earn $500,000 per year completely tax-free. The TBC was designed to stop this.

Exceeding the cap started at $1.6 million in 2017 and is indexed to CPI in $100,000 increments. It reached $1.7 million, then $1.9 million, and will hit $2.0 million when cumulative indexation reaches that threshold.

The Proportional Indexing Trap

Here's where most people get it wrong. If you've already used some of your TBC, your remaining cap doesn't increase by the full indexation amount. It increases proportionally.

The difference is $150,000. That's $150,000 less that Sarah can move into tax-free pension phase than she might have expected. This proportional indexing catches many people off guard.

What Counts Toward the TBC?

Not everything in super counts toward your Transfer Balance Cap. Only amounts transferred into pension phase are counted.

Counts toward TBC:

• Account-based pensions
• Transition to retirement pensions (once you meet a condition of release)
• Defined benefit pensions (special calculation applies)
• Death benefit pensions received from a spouse

Doesn't count:

• Super in accumulation phase
• Super you haven't converted to pension yet
• Transition to retirement pensions while still working (before retirement)

What Happens If You Exceed the Cap?

Exceeding your TBC isn't the end of the world, but it does have consequences. The excess amount must be "commuted" � moved back from pension phase to accumulation phase. You can't just leave it there.

On top of that, you'll pay Excess Transfer Balance Tax on the notional earnings of the excess amount. For your first breach, this is 15%. For subsequent breaches, it's 30%. The ATO calculates notional earnings using the general interest charge rate, regardless of what your investments actually earned.

Strategies for Couples

Each person has their own TBC. For a couple, that means up to $4.0 million can be in tax-free pension phase combined (2 � $2.0M). This creates planning opportunities.

If one partner has significantly more super than the other, contribution splitting can help equalise balances. You can split up to 85% of your concessional contributions to your spouse each year. Over time, this ensures both partners can fully utilise their TBC.

When one partner dies, things get complicated. A reversionary pension continues in the surviving spouse's name, but it counts toward their TBC. If the surviving spouse is already at or near their cap, they may be forced to commute some pension back to accumulation within 12 months.

Death and the TBC

Estate planning around the TBC requires careful thought. When you die, your super can pass to your spouse as a reversionary pension or as a lump sum that they then use to start a new pension.

Reversionary pension: Automatically continues in spouse's name. Counts toward their TBC from the date of your death (but they get 12 months to sort out any excess).

Non-reversionary: Spouse receives lump sum, can start new pension. More flexibility, but no automatic continuation.

The choice between reversionary and non-reversionary depends on your spouse's existing TBC usage and their likely super balance at the time of your death.

Planning Around the TBC

If you haven't started a pension yet and the TBC is expected to increase, there's an argument for waiting. Starting a pension now locks in your proportional usage at the current cap. Waiting until after indexation means your full cap is higher.

However, this needs to be balanced against other factors. The tax-free earnings in pension phase are valuable. Delaying pension just to get a slightly higher cap might cost you more in tax than you save.

For those with super well above the TBC, the decision is simpler: move $2.0M into pension phase, leave the rest in accumulation. The accumulation portion still earns returns, just taxed at 15% instead of 0%.

The Bottom Line

The Transfer Balance Cap limits tax-free pension phase super to $2.0 million. The key trap is proportional indexing � once you use a percentage of your cap, that percentage is used forever. Couples can have up to $4.0M combined in pension phase. Exceeding the cap triggers commutation requirements and excess transfer balance tax.

For most Australians, the TBC won't be a constraint. The average super balance at retirement is well under $1 million. But for those approaching or exceeding the cap, understanding these rules is essential for tax-efficient retirement planning.