When is $2 Million Not $2 Million?

One of the most misunderstood aspects of retirement is the mysterious superannuation transfer balance cap, which recently rose in July to reach $2 million.

In simple terms, the transfer balance cap is a lifetime limit on the amount of superannuation a person can move into their retirement phase pension over their lifetime.

Of course, it is possible to have a larger amount than $2m within superannuation; but $2m is the existing limit that can actually become an income stream with all of the best tax breaks.

Any excess super remains in a separate accrual super account, which still has the 15% earnings tax applied, or can be withdrawn once access is allowed.

Why $1.9m Plus $100k Doesn’t Equal $2m

Where this issue gets very confusing is when people want to add a second retirement pension account but are understandably confused about how much can be added.

For example, someone who rolled over $1.9m superannuation into pension mode last year might think that they can add a further $100,000 now that the 2025-2026 transfer balance cap has been increased to $2m due to indexation.

In fact, for this example the super member can’t add any money to their retirement income account at all because they used all of their transfer balance cap on the year it was made.

How to Work Out Your Cap

The reason for the confusion is that each person has their own personal transfer balance cap that applies for their lifetime.

To add to their pension account or to set up an extra retirement phase pension, they need to know what percentage of the existing transfer balance cap they used up when they first set up a retirement phase pension.

Another important thing to note here is that the amount in the retirement income pension fund, once deposited, can still increase over time due to investment income – the transfer balance cap only applies at the time the money is switched in.

So, it is very possible to have a pension account with more than $2m in it if earnings have exceeded pension payments.

Percentages Rule

The number you need to find here is the percentage of the transfer balance cap that applied when you set up your first retirement income fund.

For example, if you started a pension with $1.425m on July 1, 2024 then you used 75% of the $1.9m transfer balance cap at that time.

That means when the general cap rose to $2m on 1 July 2025, your personal cap also rose by 25% of the increase.

There is an increase in the unused portion of the initial cap, but no change to the portion of the cap that has already been used—so, in this example, the cap will have risen from $1.9m to $1.925m.

That’s still under the new cap of $2m, which would apply to any fresh pension applications.

Once a portion of the cap in any given year is used up, it is extinguished, and only the remaining unused portion is indexed.

This clearly demonstrates why it pays to be careful when starting a retirement pension, because the size of the transfer balance cap at that time can be important.

By waiting until 1 July in any given year when the cap is indexed, the transfer balance cap can be maximised, which can help to increase the amount of further contributions that can be used for another retirement phase pension income stream.