Transfer balance cap reprieve flagged amidst market falls

Advisers are calling for Treasury to review the suitability of the $1.6 million transfer balance cap (TBC) after the recent market drop left many new pension account holders well under the limit without recourse to make further contributions.

For these clients, many of whom hit their maximum $1.6m allowance and started a retirement phase income stream just prior to the stock market’s precipitous fall in February, the timing could not be worse; as they have nominally used all their cap space, they are not allowed to ‘top up’ their account and maximise the level of savings that sit in a tax free environment.

‘I’ve worked really hard for what I’ve achieved and I feel like I’ve been disadvantaged,” says Anne, a retired teacher from Adelaide and client of Shaw and Partners adviser David Dall. ‘It’s a bit hard now because I can’t add any more and I’m just languishing behind.”

Dall points to measures already taken by the Morrison government to soften the blow for pensioners during the coronavirus crisis, including a halving of the minimum pension drawdowns and a double cut to the deeming rates totalling 75 basis points.

“They were quick to halve the pension [minimum withdrawal] rate,” Dall says. “They could fast track this issue as it’s in the same basket – it’s just a question of whether they prioritise it.”

The possibility of the TBC being warped by a serious market correction was flagged by Treasury in its 2016 explanatory memorandum to the Bill introducing the TBC, with section 3.58 saying: “The Government will review the impact of the transfer balance cap amendments if there is a macroeconomic shock that substantially affects retirement incomes.”

Dall’s assertion that the issues are in the same basket is not askew; Treasury’s 2016 memo went so far as to compare the scenario to government’s pledge to review the minimum pension withdrawals in a similar situation.

Dall says multiple clients have been handicapped by the rigidity of the TBC during the market fall. Anne, however, was particularly impacted, having “clicked on” to the pension at the maximum level in February, just before the correction.

“She would love that one last chance to top it up and maximise her superannuation,” Dall says.

He acknowledges that the government is under tremendous pressure and facing far greater issues than compensating wealthy retirees for what amounts to a large dose of bad luck and unfortunate timing. He doesn’t expect a lot of sympathy for these members while other people are being made redundant or facing serious health concerns. “Those people are the priority,” he says.

The government’s quick response on the deeming rate and the pension minimum withdrawals were an appropriate first response, Dall reckons, but any further review should consider the plight of people like Anne.

“These clients just want to maximise their super,” Dall says.

Discretionary powers

According to Verante Financial Planning director and adviser Liam Shorte, the plight of people disadvantaged after locking in their $1.6 million TBC right before the correction poses a “tough question”.

“Someone aged 65 is concerned with funding their needs for an average of 22 more years, [with] at least one of a couple looking at 27 years,” Shorte says. “Confidence has been decimated and plans throw in to disarray, so it would be good to give them some lee-way to establish their retirement funding arrangements.”

In lieu of government intervention, Shorte believes the commissioner of the Australian Tax Office could step in.

“The current global crisis is exactly what the ATO discretionary powers around TBC rules were meant to address,” he continues. “This could allow superannuation members the opportunity to replenish their pension accounts despite the fact they have previously maximised their current $1.6 million TBC.”

A suitable deadline should be put in place to allow these contributions within the 2020/2021 financial year, Shorte explains, but this could be extended to the following financial year to give people time to rearrange their finances and to help them avoid selling at the bottom of the market.

Like Dall, Shorte knows there are people doing it a lot tougher than well-funded retirees. But that doesn’t mean they don’t deserve a fair go.

“While there may be little sympathy or support for such measures I keep trying to remind people that this cohort is usually the one that has contributed the most over their working lives to the tax base and put the economy in a position where it could afford the other stimulus measures,” he says.