The Transfer Balance Cap: how much super can sit in the tax-free retirement phase, and how the $2.1 million limit works in practice

# The Transfer Balance Cap: how much super can sit in the tax-free retirement phase, and how the $2.1 million limit works in practice

For anyone with a superannuation balance approaching or above $1.5 million, the Transfer Balance Cap (TBC) is the single most consequential structural rule in their retirement planning. It limits how much super can be placed into the retirement phase — the portion of superannuation where investment earnings are completely tax-free. Understanding it before, rather than after, crossing the threshold is what separates orderly retirement-phase structuring from a costly scramble.

The general TBC and indexation history

The TBC was introduced on 1 July 2017 as part of the government's super reform package. Before that date, there was no limit on how much super a member could move into retirement-phase pensions, and all earnings on those pensions were tax-free. The TBC imposed a lifetime cap on how much could enter that tax-free zone. The general TBC began at $1.6 million in 2017-18 and has since been indexed upward in line with CPI: $1.7 million in 2022-23, $1.9 million in 2024-25, $2.0 million in 2025-26, and — following indexation on 1 July 2026 — $2.1 million for 2026-27, an increase of $100,000 (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/smsf-newsroom/general-transfer-balance-cap-indexation-on-1-july-2026, as at August 2026).

Two consequences of that indexation are worth stating separately, because they land differently. Anyone starting a retirement-phase pension for the first time on or after 1 July 2026 is entitled to a personal TBC of the full $2.1 million. Anyone who already has a personal TBC and has not previously been at or exceeded it gets an increase that is only a proportion of the $100,000, depending on their unused cap space — which is the proportional indexation rule covered in our article on transfer balance cap proportional indexation. And if you were ever at or above your cap, you get no increase at all.

One timing note that catches people who check early: although indexation took effect on 1 July 2026, the ATO has said updated personal transfer balance caps were not expected to display in ATO online services until 13 July 2026. A figure that looked unchanged in the first fortnight of July was not necessarily wrong — it was not yet updated.

Personal cap vs general cap

A critical nuance: each member's personal Transfer Balance Cap is not automatically the current general figure. The personal cap depends on when the member first started a retirement-phase pension, how much of the cap they used at that point, and what proportion of subsequent indexation increases they are entitled to. A member who first commenced a pension in July 2017 and used their entire $1.6 million cap at that time has received only partial benefit of the indexation increases since — the formula is set by the ATO and is specific to each member's history.

The practical implication is simple: before assuming you have cap headroom, check your personal Transfer Balance Cap in your myGov ATO portal. The headline $2.1 million figure may be different from your personal cap, sometimes substantially.

The cap limits retirement-phase only — not total super

An equally important distinction: the TBC limits only how much super can be in retirement phase. It does not limit total super. A member with $3.1 million in super is not required to withdraw the excess over the TBC — they simply hold the amount above their personal cap in accumulation phase, where earnings are taxed at 15 per cent rather than zero.

For a member with $3.1 million, holding $2.1 million in a retirement-phase account-based pension and $1.0 million in accumulation is a perfectly valid structure. The accumulation earnings are less tax-favoured but are still inside the concessional super environment. (Note: from 1 July 2025 the additional Division 296 tax may apply to total super balances above $3 million — that is a separate framework.)

The Transfer Balance Account and how cap is consumed and freed up

Each member's cap usage is tracked through a Transfer Balance Account (TBA), a notional account maintained by the ATO. Credits to the TBA — which consume cap — include:

• Starting a retirement-phase pension (counted at the value transferred into the pension at commencement)
• Receiving a reversionary pension on the death of a spouse (with the special 12-month deferral discussed below)
• Certain rollover events

Debits to the TBA — which free up cap — include:

• Commuting a pension back to accumulation
• Lump sum withdrawals from retirement-phase pensions
• Structured settlement payments for personal injury

One critical trap: regular pension drawdowns do NOT debit the TBA. Drawing $80,000 a year from your account-based pension reduces your account balance but does not restore cap room. The structural way to free up cap room is to commute some or all of a pension back to accumulation.

Reversionary pensions and the 12-month TBA deferral

When a member dies and their account-based pension is set up as a reversionary pension, it continues paying to the surviving spouse automatically. The pension does not commute and re-commence; it simply continues with the surviving spouse as the new pensioner.

For TBC purposes, however, the reversionary credit is deferred for 12 months from the date of death before crediting to the surviving spouse's TBA (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/retirement-withdrawal-lump-sum-or-income-stream/transfer-balance-account). This deferral is deliberate — it gives the surviving spouse 12 months of breathing space to:

• Review their own TBA position
• Restructure existing pensions (commute their own back to accumulation if needed)
• Decide whether to keep, commute, or partially commute the reversionary pension when the credit lands

Note on reporting: while the credit is deferred 12 months, the fund still has to report the starting value of the reversionary pension within its normal Transfer Balance Account Reporting (TBAR) timeframe. The ATO defers the IMPACT of the reported value, not the reporting itself.

Excess transfer balance — when TBA exceeds the personal cap

For a surviving spouse who already holds their own retirement-phase pension close to their personal TBC, the reversionary credit 12 months later can produce an excess transfer balance — TBA exceeds the personal cap. When this happens:

• The excess must be commuted back to accumulation (a notice to commute is issued by the ATO).
• Excess Transfer Balance Tax (ETB Tax) applies to the notional earnings on the excess amount during the period it sat above the cap.

Notional earnings rate is calculated daily as:

(90-day Bank Accepted Bill yield + 7 percentage points) ÷ days in calendar year

(ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/retirement-withdrawal-lump-sum-or-income-stream/excess-transfer-balance). Notional earnings compound daily.

ETB tax rate on those notional earnings:

• 15% for first-time excesses
• 30% for subsequent breaches

The tax is applied by the ATO (assessed against the member; can be paid via the fund through a release authority). Pre-bereavement modelling for high-super couples should include this scenario: what does the surviving spouse's TBA look like 12 months after death, and is there a structural problem to plan around?

The CDBIS exemption

One important exemption applies to recipients of Capped Defined Benefit Income Streams (CDBIS) — government defined benefit pensions from schemes such as CSS, PSS, DFRDB, and MilitarySuper. If a member's TBA exceeds their personal TBC solely because of a CDBIS, no excess transfer balance tax applies and commutation is not compulsory. Where a CDBIS sits alongside an account-based pension and the excess is attributable to the account-based pension, the excess from the account-based portion must still be commuted (FirstTech/Colonial First State, Capped Defined Benefit Income Streams Guide 2025-26). This is a meaningful protection for public sector retirees whose government pension has grown to a substantial value. (See the related `defined-benefit-pensions-centrelink` article for the broader DB framework.)

Worked strategy example #1 — managing the initial commencement

Consider Christine, 62, with $2.4 million in super (all accumulation phase). She is planning to retire and commence a pension. Her personal TBC is the general $2.1 million (she is commencing after the 1 July 2026 indexation, so she gets the full figure). She has $400,000 of "excess" relative to the TBC.

Her structure: commence a $2.1 million account-based pension, leaving $300,000 in accumulation. The pension's earnings are tax-free; the accumulation earnings are taxed at 15%. Her annual drawdown comes from the pension portion. The accumulation continues to grow (slowly, given the 15% earnings tax) and provides flexibility — she can roll some of it into her pension later if commutations free up cap room (e.g. via partial commutations producing TBA debits).

Her age now matters: under preservation/condition-of-release rules (see related article), she has full access to both pots once retired at 62. The $400,000 in accumulation is functionally available; it just sits in a less tax-favoured wrapper for now.

Worked strategy example #2 — pre-bereavement TBC planning for HNW couple

Consider Robert (72) and Susan (71). Each has their own account-based pension at the personal TBC limit (~$2.0 million each, given they both commenced before the 1 July 2026 indexation — and because each was already at their cap, neither received any part of the $100,000 increase). Combined retirement-phase super: $4.0 million. Their other assets bring total wealth close to $6.5 million.

Robert's pension is set up as reversionary to Susan. If Robert dies first, the $2.0 million reversionary pension would credit to Susan's TBA 12 months after his death — but Susan already holds her own $2.0 million pension at her personal cap. The reversionary credit would push her TBA to $4.0 million, generating a $2.0 million excess.

To manage this: in advance of either death, the couple's adviser models options:

• Commute Susan's pension back to accumulation before Robert dies (or within the 12-month grace period after) — freeing up $2.0 million of TBA room into which the reversionary can land. Susan's commuted balance sits in accumulation at 15% earnings tax, which is the cost of the structure.
• Convert Robert's pension to a non-reversionary pension during his lifetime so that on death the death benefit is paid as a lump sum to the estate rather than as a reversionary stream — different tax-and-cap consequences but avoids the TBA crediting problem.
• Mixed approach: partial commutation by Susan, partial reversion to her, balance to estate.

The right answer depends on detailed numbers including expected fund earnings, tax positions of beneficiaries, and the couple's broader estate plan. The point of pre-event modelling is to make this a deliberate choice rather than a reactive one. The 12-month deferral is the planning window — it is generous, but it requires using the time deliberately.

General planning considerations

Common planning considerations around the TBC include:

• Timing the initial pension commencement to maximise personal cap access (commencing close to indexation events can lift the personal cap)
• Equalising superannuation balances between spouses over working years so that combined TBC headroom is preserved across the household
• Structuring death benefits as reversionary pensions or lump sums depending on the surviving spouse's anticipated TBC position
• Monitoring the annual indexation of the general TBC for any additional cap room that may become available
• Using the myGov ATO portal to verify your personal TBC at least annually

Sources

• Australian Taxation Office (ATO) — Transfer balance account
• Australian Taxation Office (ATO) — Excess transfer balance
• superguide.com.au — Super transfer balance cap
• dbalawyers.com.au — Managing tbc minimising excess transfer balance tax

This article contains general information only. It does not constitute personal financial advice and does not take into account your individual financial situation, objectives, or needs. Personal Transfer Balance Caps are individually calculated by the ATO; the figures and examples in this article are illustrative. Transfer Balance Cap indexation, excess transfer balance tax rates, and reversionary pension rules are subject to change. Before acting on any information in this article, seek advice from a licensed financial adviser. Information is current as at 5 May 2026 — confirm your personal Transfer Balance Cap in your myGov ATO portal and current rules at ato.gov.au.

Theodore Karoumbalis is an Authorised Representative (No. 1237098) of iAdvice Technology Pty Ltd, AFSL 526700.