Details of legacy pension changes released

legacy pension commutation

The much awaited details regarding changes to commuting legacy pensions have been released as part of a consultation process by Treasury.

Treasury has released draft regulations for consultation that will give effect to changes announced in the budget that allow for the commutation of a legacy pension but has not included flexi-pensions in the products covered by changes.

The proposed modifications to three different acts related to superannuation are contained in the Treasury Laws Amendment (Measures for Consultation) Regulations 2021 released late last week for two weeks of public consultation.

The explanatory materials (EM) for the exposure draft regulations state the amendments, which will add exceptions to the commutation rules in the Superannuation Industry (Supervision) Regulations 1994 and Retirement Savings Account Regulations 1997 will apply to life expectancy pensions, life expectancy annuities, market-linked pensions and market-linked annuities.

“The exceptions allow commutations to occur to comply with commutation authorities. The commutation authorities would require recipients to address excess amounts above the transfer balance cap for certain products,” which the EM stated were outlined in subsection 294-130(1) of the Income Tax Assessment Act 1997.

The EM noted that without the exceptions, retirement-phase recipients of the four products listed above could not address any existing excess transfer balance and were unable to comply with transfer balance cap rules.

“The exceptions rectify this problem by enabling recipients of affected products that were commenced on or after 1 July 2017 to undertake commutations to resolve excess transfer balance amounts,” it said.

“Individuals who were previously recipients of a capped defined benefit income stream and commuted a lump sum to directly purchase an affected product on or after 1 July 2017 can now commute up to the amount that they are in excess of the transfer balance cap from the commenced income stream.

“Accordingly, the lump sum that results from commuting the excess transfer balance would reduce a recipient’s transfer balance account.”

The EM further stated a commutation under these changes can only occur in response to a commutation authority that was issued after the ATO had determined the excess transfer balance for the individual.

The draft regulations also allow for a variation in the total payment amounts to be made in a year to recipients of life expectancy annuities and life expectancy pensions to allow a commutation to address an excess transfer balance.

“These amendments ensure that funds can reduce annual payment amounts to avoid solvency problems that may arise following commutations which reduce the value of underlying assets which support these income streams,” the EM said.

Related amendments to the Income Tax Assessment (1997 Act) Regulations 2021 have also been proposed that will ensure the period in which people with the listed products start to accrue excess transfer balance tax liabilities begins on or after the commencement of the regulations.

“This will allow appropriate tax outcomes for these individuals given their prior inability to comply with the transfer balance cap rules,” the EM said.

The consultation closes on 15 December and any changes made via the regulations, which are a legislative instrument, will come into effect on the day after the instrument is registered on the Federal Register of Legislation.

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