The SMSF Association has welcomed the federal government’s new measure allowing the partial commutation of certain non-commutable legacy pensions.
The measure, outlined in the government’s mid-year economic and fiscal outlook (MYEFO), will enable retirees with “legacy pensions” who had previously been unable to commute amounts in excess of their transfer balance cap (TBC) to undergo the required partial commutation.
According to the MYEFO, the measure would also ensure “appropriate tax outcomes for these retirees given their prior inability to comply with the TBC rules”.
“We have long advocated the modernisation of these pensions – better known as legacy pensions – so the government’s decision to amend the law to ensure that retirees who have commuted and restarted these pensions are treated equitably under the TBC is a welcome reform,” SMSF Association deputy chief executive Peter Burgess said.
“Certainly, it will be appreciated by the minority of SMSFs who have been affected as we don’t believe the TBC rules work effectively in situations where a lifetime or life expectancy complying pension is converted to a market-linked income stream and the commencement value of the market-linked pension exceeds the member’s TBC.”
Burgess also voiced concerns regarding the requirement that a new commutation formula for market-linked incomes streams commuted and restarted on or after 1 July 2017 be retrospectively applied, noting it could cause excess pension balances with excess transfer balance earnings accruing from the original date of the commutation.
“This may be the case because the revised commutation figure using the new legislated formula could give rise to a substantially lower TBC debit than originally reported using guidance material available at the time. It’s also not clear how re-reporting could occur if the SMSF has subsequently been wound up,” he pointed out.
In addition, he highlighted the SMSF Association’s proposed solution to the issue, put forward in July last year, which called for the creation of a new TBC debit to write off any unintended pension balance excess that might emerge as a result of the introduction of the new formula.
“The amendments announced in the MYEFO paper appear consistent with this write-off TBC debit approach and we look forward to consulting on the draft legislation and making further improvements to the legacy pension system,” he added.
Calls to reform legacy pensions have been made on a regular basis by the SMSF sector including the use of an amnesty to allow pension holders to move products without losses.
In September 2020 then Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume said legacy pension reforms were not on the parliamentary agenda as COVID-19 had pushed back a range of legislative measures and left no room for other issues.
In a response to this claim, Australian Executor Trustees senior technical services manager Julie Steed said a solution had already been presented to the government by the SMSF sector and it would take very little effort by the government to enact the reforms.
