To the delight of SMSF members and advisers, the Treasury has relaxed restrictions previously preventing members from exiting legacy pension products or fully utilising their benefits.
A New Legacy Pension law was passed on December 7, allowing members of previously non-commutable SMSF legacy pension accounts to exit obsolete products and restructure their retirement savings to suit current conditions.
A non-commutable income stream is one that can’t be converted into a lump sum. This condition inadvertently trapped over 17,000 Aussie retirees in various ill-fitting and poorly understood pensions, including legacy lifetime, life expectancy and market-linked income stream products. Conditions also prohibited some members from winding up an SMSF no longer suitable for their needs.
The new law (Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024) provides members with a five-year window, as of December 7 2024, to exit these pensions. It also introduces more flexible pathways for members seeking to leverage any benefits held in reserves.
Allocating Pension Reserves Also More Flexible:
Under previous conditions, reserves from a non-commutable fund were treated as a concessional contribution, attracting penalties if totals exceeded annual contribution caps. Consequently, many trustees allocated only a small portion of reserves to members each year, leaving large amounts trapped in these pensions and underutilised for many years.
New conditions, however, treat reserve allocations as part of the much higher annual non-concessional contribution cap. Capital or benefits may now be used to commence an alternative retirement phase interest, left in an accumulation interest account or withdrawn from superannuation without penalty.
While conditions benefit a pensioner while alive, it will not be available where a ‘pension reserve’ exists and the former pension recipient(s) has died. Unless allocated under the ‘fair and reasonable’ approach, any reserve allocation(s) made to a beneficiary will be counted against their non-concessional cap.
Impacts Upon Asset Test Conditions
While most of the superannuation and SMSF industry are pleased about the change, industry stakeholders do remain concerned about the potential impacts of the new law upon Centrelink’s asset test. Technically, the commutation of a legacy pension would cause a member to lose their asset test exemption and trigger a five-year clawback of any social security entitlements.
In response to concerns, however, Assistant Treasurer Stephen Jones has stated “no debts will arise from the reassessment of these products’ asset values for the period before conversion”.
What about DIV 296 Implications?
Current drafts of the controversial Division 296 tax legislation state that any reserve allocations made from July 1, 2025, will be counted toward a member’s superannuation earnings.
Therefore, members taking advantage of the legacy pension amnesty may be negatively impacted if Div 296 legislation passes, and they don’t move before associated tax conditions come into play at the start of the New Financial Year.
As always, before making any decisions regarding your SMSF, speak to an experienced SMSF specialist.