Pensions, SMSF, Tax

Act on legacy pensions before $3m cap

Division 296 $3 million cap Legacy pensions SMSF Federal budget

SMSF trustees with legacy pensions should convert or exit them to avoid an additional liability when Division 296 tax is introduced.

With no government action on an amnesty for transitioning out of legacy pensions in the 2024 federal budget, an SMSF technical expert has advised those who have them to prepare to convert to another pension or exit before the proposed Division 296 tax begins on 1 July 2025.

Heffron managing director Meg Heffron pointed out the current system allows these types of retirement benefits to be converted and urged trustees to act swiftly to avoid an additional liability when the $3 million soft cap is introduced.

“There are some drivers to take action now for legacy pension members who are also facing extra taxes under the proposed Division 296 tax,” Heffron noted.

“Many older members who have pensions with reserves are already trying to get rid of them because there are major challenges when someone dies while their pension is still running. In a nutshell, the reserves can’t easily be paid out to beneficiaries leaving some of the super trapped inside the super fund.

“When these pensions are wound up during the member’s lifetime, the reserves are usually put into a member’s account as part of starting a new pension. Currently there’s no penalty for doing this but all that will change when Division 296 comes in.

“Reserve amounts added to the member’s account as part of winding up a complying lifetime pension will be treated as earnings. So for those with large super balances, the reserves will be taxed if the pension is wound up in 2025/26 and beyond, but not if it’s done now,” she said.

Heffron pointed out this wasn’t the only issue with legacy pensions and the Division 296 tax, with fund liquidity also being a consideration.

“The techniques used to get rid of legacy pensions often involve causing the member to exceed their transfer balance cap. This is why it’s generally only possible for people with large super balances,” she said.

“Many people with more than $3 million in super will look to reduce their balance in the lead up to 2025/26 to minimise the impact of the Division 296 tax.

“Imagine their disappointment if they discover that winding back their super in this way – by withdrawing a lot of money from their accumulation account now – means they no longer have enough to create the excess they need to unwind their legacy pension?

“Anyone with a legacy pension should definitely consider it carefully before taking large amounts out of super.

“Since there was nothing at all in the 2024 federal budget, it seems members with these pensions are still on their own.

“For many people, 2024/25 will be the year to take action regardless.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital