Why didn't their personal TBC increase due to indexation?

Adviser Question:

My client commenced an account based pension on 1 July 2021 for $1.7 million.  Then a year later, they made a lump sum withdrawal of $100,000.

When the general transfer balance cap indexed to $1.9 million on 1 July 2023, we were advised that their personal transfer balance cap remained at $1.7 million.  Why didn’t they receive at least partial indexation?

Answer:

Clients have their own personal transfer balance cap, which determines the amount they can transfer into retirement phase income streams.

When they first have a transfer balance account (generally when they commence their first retirement phase income stream) their personal transfer balance cap equals the general transfer balance cap at that time.  In this client’s case, when they commenced the account based pension on 1 July 2021, the personal transfer balance cap was $1.7 million which equalled the general transfer balance cap at that time.

When the general transfer balance indexed to $1.9 million on 1 July 2023, the ‘proportional indexation’ calculation determined whether a client’s personal transfer balance cap also increased. 

Under proportional indexation, a client’s personal transfer balance cap only receives a percentage of the indexation that applies to the general cap, based on the unused portion of their personal cap.  This unused portion is calculated with reference to the highest transfer balance account value that the client has ever previously had, and what their personal transfer balance cap was at the earliest time that value occurs.[1]

In this client’s case, their highest transfer balance account value was $1.7 million.  The subsequent withdrawal of $100,000 did not impact this value.  As a result, the client’s highest transfer balance account of $1.7 million (on 1 July 2021) equalled their personal transfer balance cap at that time of $1.7 million, resulting in an unused portion of zero.

This means the client’s personal transfer balance cap will not increase at any time in the future due to proportional indexation, as their unused personal transfer balance cap amount will always be zero.

Clients can access their personal transfer balance cap information, including their highest ever transfer balance, via ATO online services through myGov.[1]  Below is an example of the information under Super > Information> Transfer balance cap:

_{[1] These two factors are used to determine a client’s ‘used cap percentage’ (rounded down to nearest whole number).  The unused portion (unused cap percentage) is then 100% minus the used cap percentage.}  

_{(2) A NOI must be provided by the earlier of the date the client lodges their income tax return for the year of contribution and the end of the financial year after the year of contribution.  Certain events after a contribution is made (eg commencing an income stream, withdrawing, or rolling over benefits) may also impact the validity of any future NOI.}