Boost to retirement funds coming

Price rises are not usually good news for retirees, but a big increase in the December consumer price index (CPI) figures, which many economists are predicting, could trigger a tax-free retirement savings boost next year.

The Australian Taxation Office (ATO) released an update recently explaining that indexation of the general transfer cap on superannuation funds would occur on 1 July 2021 if the CPI figure for the December quarter was 116.9 or higher.

The CPI figure for the September quarter, which was released on 28 October, was 116.2, falling just short of the mark, but many economists expect a bigger increase for the December quarter, with Deloitte Australia forecasting 117.

The transfer balance cap was introduced in July 2017 as a way to tax the superannuation accounts of the wealthiest retirees. Any earnings over the cap amount, currently $1.6 million, are eligible for tax, while the amount under the cap is tax free.

The tax-free cap amount will move to $1.7 million from July 2021 if indexation kicks in.

Once indexation of the transfer balance cap occurs it will create two tiers of retirees. Those who start their first retirement phase income stream on or after the indexation date will have a transfer balance cap of $1.7 million. This is $100,000 more than those who have already had a transfer balance account, and who at any time met or exceeded the current $1.6 million transfer balance cap, who will not be entitled to the indexation boost.

If the indexation occurs in 2021, those who are still in the workforce will also be able to contribute more into their superannuation from 1 July 2021.

The indexation changes will also affect the defined benefit income cap for some retirees.

When the general transfer balance cap is indexed, the defined benefit income cap, which is currently $100,000 for most people, will be indexed to $106,250.

This means that investors may notice a change in the amount their fund withholds from their pension or annuity if they receive income from a capped defined benefit income stream and are 60 years old or over.

Lyn Formica from self-managed super fund specialist Heffron told The Australian that many expected indexation to occur for the first time this year.

“We thought the changes might happen in 2020 but COVID put a brake on it,” Ms Formica said. “Now investors are surprised at the rebound in the economy and I expect many will be surprised to see the caps lifting as well.”

For more information on how indexation works, visit the ATO.

Do you expect indexation will occur next year? How will it change your retirement plans?

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Written by Ben

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