Money

Worried about the $1.9m transfer balance cap on super? Try this online tool

Superannuation has plenty of confusing (and boring!) terminology, with ‘transfer balance cap’ being one of them.

If you’re planning your retirement and worried about hitting the $1.9m transfer balance cap, Nicole Pedersen-McKinnon has found a superannuation calculator you might want to play around with to estimate your future retirement income.

By Nicole Pedersen-McKinnon

Superannuation is a tax-friendly place to store your money

There’s lots of benefits to Australia’s superannuation system, mostly the tax breaks we get at retirement.

As we accumulate super during our working lives, it’s taxed concessionally - generally around 15%. When you convert superannuation into retirement income, it usually becomes completely tax-free.

Australia is usually known for being a highly taxed country, where capital gains tax and income can be taxed as high as 45%, but superannuation is almost the opposite.

Except if you get in a pickle with your transfer balance cap.

This cap - which is now set at $1.9 million after being introduced in 2017 -  is a limit on how much can be transferred from an ‘accumulation account’ (the concessionally taxed phase) to a ‘retirement account’ (the tax-free phase)… and it can have a significant impact on your retirement strategy.

Now there’s a superannuation calculator that incorporates this tricky and complex rule to give you more flexibility to plan different retirement scenarios. 

An online tool called the Retirement Income Simulator by superannuation fund and finance giant Mercer incorporates the impact of the transfer balance cap on different scenarios, allowing you to play around with different calculations to plan the best outcome for you.

Citro reviews a range of different online calculators - including this new YourSuper comparison tool for people with a MySuper fund - so you can start to model and think about the type of retirement you want (and how to fund it).

About the Retirement Income Simulator

In the first tool of its kind, Mercer’s Retirement Income Simulator has been rebuilt, recalibrated and relaunched to incorporate the impact of the federal government’s $1.9 million transfer balance cap rules.

Mercer says its calculator allows users to comprehensively ascertain if they are likely to exceed the transfer balance cap and determine the best super strategy in the lead up.

So let’s see.

How the new retirement income simulator works

We know that this is Australia’s only online calculator to date to factor in the legislative change to the transfer balance cap. But let’s come back to that and look at the calculator’s core functionality first.

The default retirement assumption is again 67 and Mercer assumes you want income of $51,000 a year – or roughly in line with the ASFA Retirement Standard for a comfortable lifestyle. 

Remember that $51,000 a year income is tax-free income and assumes couples or singles own their own home.

The tool works backwards from that to determine how long your projected lump sum will last. You can amend this annual income in the final calculator step, if you are targeting a more expensive retirement.

There is a nice slide navigation option for your own details – or just click and manually input the figures.

As with other calculators, not just your income and contributions but fees and inflation can be adjusted, too. 

The defaults are in the ball-park of other superannuation calculators at 0.1% asset-based administration fee, a $400 insurance premium, 2.5% for CPI and 1.5% allocated for improvements in living standards (the same as Moneysmart and various other calculators).

This calculator starts by estimating your future take-home pay, in today's dollars. That stays level under the default assumptions – wages inflation is plugged in at the same rate as consumer prices inflation. That’s not unusual.

But the investment return options are more sophisticated than any other retirement income calculator.  

There is a drop-down box giving you specific-fund-type choice; the expected annual returns from each are then incorporated into your forecast. 

What’s more, the automatic setting is a lifestyle fund – one that gradually phases down from equities and into fixed-income investments, as retirement approaches – with returns that vary accordingly each year (and tax accounted for).

Then, at results phase, you can see your progressively increasing pension payments beneath the diminishing retirement drawdown. 

The graphic is one of the most effective and insightful of all the calculators.

The ability to model career breaks (and the expected age and duration of no income) and career changes (and the expected age and salary) is also over and above. Remember, Moneysmart’s retirement planner income calculator can also model career breaks.

This calculator goes further again, though, and carries a feature that simulates lump sum drawdowns at and during retirement.

Yet another impressive extra with this calculator is the ability to select whether you rent, are repaying a mortgage or have a fully paid off house.

You can factor in external investments and other income, too.

It also lets you model multiple retirement strategies and scenarios, which few others do.

And embedded is the ability to take an investment-risk attitude quiz to find out your risk profile.

So, what of the transfer balance cap functionality?

The upshot of the transfer balance cap and your superannuation

There is huge merit to incorporating the $1.9million transfer balance cap when you model your retirement income as it affects both the pre- and post-retirement phases.

Indeed, it is probably the most complicated superannuation rule change for a good number of years.

The calculator lets you set up 2 separate ‘profiles’ with not just partner-specific super stats and contributions, but different desired retirement incomes and ages, because there may well be strategies for partners, in particular, to fix the transfer balance cap problem.

The full report can then be delivered to you in a free PDF, either emailed or by direct download (after a calculator feedback survey).

What’s vital is whether any person’s projected end superannuation balance hits the $1.9 million.

“If couples manage the distribution of their balances between partners, most would be unlikely to be affected,” says Richard Starkey, consulting actuary, retirement income modelling and apps at Mercer.

But Mercer has been able to come up with instances – using its powerful modelling tool – in which people might be impacted. And the fund manager has shared the ‘danger zones’ with Citro.

Who might be in the transfer balance cap danger zone?

Mr Starkey says examples of people at risk of exceeding the transfer balance cap, are:

  • Singles under 30 who are targeting a retirement income of $80,000, so approximately 1.6 times the ASFA ‘comfortable’ income estimates.
  • Couples under 30 with evenly balanced super who are targeting a total retirement income of more than $144,000, so twice the ASFA ‘comfortable’ standard.

Note that if a couple now under 30 has all of its super with one member at retirement, then targeting an income of around $95,000 will take them into transfer balance cap territory. (All figures provide retirement income that lasts 25 years from age 67 to 91, inclusive, and allows for the Age Pension.)

Older fund members, of course, who have been saving in super for decades, might already be headed for a balance transfer cap breach depending on how much super they have.

This means they couldn’t put their entire super into one of those lovely tax-free retirement income streams

The model scenarios Mercer has provided Citro – and perhaps your own on this calculator – highlight the need to use what I call the  ‘super equalisation strategies’ to avoid falling foul of the cap. And early.  

These strategies could include spouse contributions, co-contributions and non-concessional contributions to the partner with the lower super balance, to build up their balance to be more even. 

For single people, without another balance to ‘balance’ with, though, that is more difficult. 

And don’t be disheartened by the transfer balance cap - if you’re going to exceed it, then it is a good problem to have. It means your retirement is tracking beyond comfortable..

Investments outside of super, as well, could become key. (An added advantage is that you can access them earlier than age 60.)

Nicole’s verdict on the Retirement Income Simulator

This calculator should produce a far more accurate result than calculators that only let you input your super situation today, and any concessional and non-concessional contributions above that.

What you can plug into this calculator is not just next level, but the visual representation of the results is clear and excellent.

Across the time continuum of the chart, you can also see the chance of living to particular ages.

When it comes to forecasting your retirement, Mercer’s calculator is one not to miss.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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