Pensions fix creates excess trap exit

legacy pensions excess transfer balance

Changes to pension rules will allow legacy products with excess transfer balances to convert to new products without creating concessional contributions.

SMSF members holding legacy pensions that created an excess transfer balance when commuted will be able to convert them to a new market-linked pension (MLP) and commute them without concern the excess will be treated as a concessional contribution, according to an SMSF lawyer.

DBA Lawyers senior associate Bryce Figot said regulatory changes that now allow people with an MLP started before 1 July 2017 to convert them into a new MLP without being saddled with the excess took effect from 5 April.

Figot said the changes were introduced in Treasury Laws Amendment (Allowing Commutation of Certain Income Streams) Regulations 2022 and were “modestly billed as minor technical amendments to remove errors”.

“But the new regulations effectively provide an option to commute the excess of MLPs if they cause a transfer balance excess [under the capped defined benefit income stream (CDBIS) regime],” he said during a webinar today.

“The problem with the CDBIS regime was it caused MLPs to overstate the size of the transfer balance credit, which also means the excess tends to be overstated.

“These regulations now allow complying lifetime pensions, older MLPs and lifetime pensions to be commuted and new MLPs with all pension monies, including all reserves, to be commenced without triggering any concessional contributions.”

He said additional changes meant the movement into a new MLP did not raise any concessional contributions and that excess transfer balance cap earnings would start accruing either from the date of commencement of the new MLP or from 5 April – whichever was later – and any excess could be commuted back to accumulation mode within the fund.

“This is actually a very cheap way of getting out of some big old legacy pensions and is also good because it means the fund then has no reserves,” he said.

“It is also good because it means any pension payments received are typically all income tax free and for the remaining MLPs that can’t be commuted under the new regulations, hopefully you will be able to commute that later using the relief that was announced but not yet enacted in the May 2021 budget.”

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