Question 1: a) When the transfer balance cap legislation came into effect, my credit union advised me to transfer the excess over $1.6 million to my income flow account. A calculation has been made regarding the expected profit at the end of the year and an appropriate amount has been commuted. However, earnings exceeded expectations and the account was $1,001 over the $1.6 million cap at the end of this fiscal year.

I now find that due to this excess, I am not eligible for the cap indexation and am limited to $1.6 million for the rest of my life. Since the transfer balance cap went into effect, I have made transfers of $500,000 from my retirement account. I understand I can open another income stream account as I now have $500,000 credit, but am limited to a total of $1.6 million. Is it correct?

b) What is the reason for the variable indexation of the transfer balance cap? It seems like an unnecessarily complicated way for the government to limit how much we can get in pensions.

The ‘Transfer Balance Cap’ (TBC) is the amount you can transfer into the super retirement phase, ie into an account-based pension or annuity. You can have more accumulation in the regular accumulation phase, it’s just that you can’t start a pension with those excess funds above the TBC.

You’ll notice I used the word “transfer” because if you have positive investment income after you start receiving a pension, that’s not a TBC violation. So, to measure your TBC, you are not looking at your current pension balance, but rather a credit and debit system.

Each time you start a pension, it’s a “credit”. Each time you deploy or make a lump sum withdrawal, it is referred to as a “debit”. In your case, just over $1.6 million would have been a credit when you started a pension, and when you converted (withdrew) $500,000 it was a debit, freeing up $500,000 in your TBC.

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

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

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

However, if you had already started a pension, you will only be able to use part of the indexation, depending on your highest TBC.

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

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

• To be confirmed personally:
  $1,600,000 + indexation of $37,500 = $1,637,500
  Minus TBC already used of $1,000,000 = $637,500.

Going back to yourself, since you have already used 100% of your TBC, you cannot use any indexing.

Also note that escalation is based on your highest transfer cap balance, so even if you withdrew $500,000 and that counts as a debit, escalation accounts for your highest balance, so i.e. in your case more than $1,600,000.

To answer your second question directly, the government wants to limit how much you have in retirement because it’s a very generous tax structure and they don’t want wealthy individuals to avoid tax and use it as a tax shelter strategy.

That’s why I generally encourage most people to save money for super and start a retirement after age 60 because it’s so generous.

When you say “this seems to be unnecessarily complicated”, I totally agree about indexing the TBC.

I often see an inverse relationship between simplicity and fairness, and what they’ve tried to do is make indexing “fair” by giving higher indexing to those who haven’t used much or any all their TBC. However, they got this one wrong and made it way too complex.

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

What do you consider to be ethical?

I’m not asking for this to be flippant, as your response will play an important role in what actions you should consider. For example, is the game ethical? What about pornography?

Looking for a company that doesn’t do anything “wrong”? Or do you want to invest specifically 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 an exchange traded fund can have 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 ensuring that the fund has a solid track record and reasonable fees.

To assist you, the Responsible Investment Association Australasia (RIAA) has a find product tool which allows you to select which investments you wish to avoid and/or which investments you wish to support, and then provides you with a list of matching funds.

Craig Sankey is a Certified Financial Advisor and Head of Technical Services and Advisory Enablement at Industry Fund Services

Warning: The answers provided are of a general nature and although inspired by the questions asked, they have been prepared without taking into account all of your objectives, your financial situation or your needs.

Before relying on any information, please ensure that you consider the information’s relevance to your objectives, financial situation or needs. To the extent permitted by law, no liability for errors or omissions is accepted by IFS and its representatives.

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