From 1 July 2023 existing superannuation pensioners will be subjected to a personal transfer balance cap based on their highest ever transfer balance account balance. Some will not receive the indexation they might have expected because of a common tax component strategy.

The strategy typically involves a member with an accumulation account, containing a sizable taxable component, wishing to make a large non-concessional contribution. To prevent the permanent mixing of tax components a strategy is to commence a pension with the accumulation account before making the non-concessional contribution, start a pension with the tax exempt non concessional contribution balance and, subsequently, commute the first pension back to accumulation. The highest ever transfer balance account will be the sum of the commencement value of the two pensions which will adversely affect the member’s pension indexation position into the future.

Maximising the tax-exempt component does not generally benefit the member. It represents a potential future benefit for non-tax dependant beneficiaries. Prior to the introduction of transfer balance caps there was no downside to the strategy, but its advisability is no longer automatic.