Question 1: a) When the transfer balance cap legislation came into operation I was advised by my fund to commute the excess above $1.6 million in my income stream account. A calculation was made regarding expected earnings to the end of the financial year and an appropriate amount was commuted. However, earnings were greater than expected and the account was $1001 over the $1.6m cap at the end of that financial year.

I now find that because of this excess I am not eligible for cap indexation and am restricted to $1.6m for the rest of my life. Since the transfer balance cap became law I have made $500K commutations from my pension account. My understanding is that I can open another income stream account as I now have a $500K credit but am restricted to a total of $1.6m. Is this correct?

b) What is the reason for variable indexation of the transfer balance cap? It seems to be an unnecessarily complicated way the government is limiting the amount we can have in superannuation.

The ‘Transfer Balance Cap’ (TBC) is the amount you can transfer into the retirement phase of super, i.e. in an account-based pension or annuity. You can have more build up within the regular accumulation phase, it’s just you cannot commence a pension with those excess funds above the TBC.

You will note that I used the word ‘transfer’ because if you have positive investment earnings after you commence a pension this does not cause a breach of the TBC. So, to measure your TBC, you do not look at your current pension balance, instead it’s more like a credit and debit system.

Every time you commence a pension it is a ‘credit’. Every time you rollout or make a lump sum withdrawal it is a ‘debit’. In your case, just over $1.6 million would have been a credit when you commenced a pension, and when you made a $500,000 commutation (withdrawal) it was a debit, freeing up $500,000 in your TBC.

Note that investment earnings (positive or negative) and regular income payments are not counted as credits or debits and therefore are irrelevant for TBC purposes.

When the TBC started it was set at $1,600,000. It was then indexed up by $100,000 to $1,700,000 on July 1, 2021.

If you had never started a pension before July 1, you get to use the full indexation and can start a pension of up to $1,700,000.

However, if you had already commenced a pension then you only to get to use some of the indexation, depending on your highest TBC.

For example, let’s say you had previously started a pension of $1,000,000.

That means you have used 62.5 per cent of your TBC ($1,000,000/$1,600,000) and therefore you can only use 37.5 per cent of the indexation, i.e. $37,500. In this example you can start a new pension for $637,500. This can be illustrated below:

• Personal TBC:
  $1,600,000 + Indexation of $37,500 = $1,637,500
  Less TBC already used of $1,000,000 = $637,500.

Getting back to yourself, as you have already used 100 per cent of your TBC, then you cannot use any indexation.

Also note that indexation is based on your highest ever transfer cap balance, therefore even though you have withdrawn $500,000 and it counts as a debit, indexation looks at your highest balance, i.e. in your case over $1,600,000.

To directly answer your second question, the government wants to limit how much you have in pension phase because it is a very generous tax structure and they do not want wealthy individuals to avoid tax and use it as a tax sheltering strategy.

That is why I generally encourage most people to save money to super and start a pension after the age of 60 because it is so generous.

When you say ‘it seems to be unnecessarily complicated’ I couldn’t agree more when it comes to indexation of the TBC.

I often see an inverse relationship between simplicity and fairness, and what they have tried to do is make the indexation ‘fair’ by giving a higher indexation to those that haven’t used much or any of their TBC. However, they got it wrong on this one and made it far too complex.

Question 2. What are the best ethical shares to buy?

What do you consider ethical?

I don’t ask this to be flippant, as your answer will play a large part in what shares you should consider. For example, is gambling ethical? What about pornography?

Are you looking for a company that doesn’t do anything ‘bad’? Or do you want to specifically invest in a company that does ‘good’?

Ethical investing may be your top priority, but you should also consider diversification and not just invest in one or two companies.

This is where a managed fund or exchange traded fund may be of value. They invest in a range of funds. taking into account environmental, social and governance (ESG) standards.

You should compare some of these products to find one or more that match your values, while also ensuring the fund has a solid performance history and has reasonable fees.

To assist you in this the Responsible Investment Association Australasia (RIAA) has a handy find a product tool that lets you select investments that you want to avoid and/or investments you want to support, then provides you with a list of matching funds.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives. 

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