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Consider legacy pension exits now

SMSF self-managed superannuation legacy pension market linked pension reserve allocations DBA Lawyers Bryce Figot

Legacy pension holders can take action now to exit them under proposed future changes, but should be aware of any linked arrangements that could be jeopardised.

SMSF trustees who have a legacy pension should look at commuting to a newer-style market-linked pension (MLP) to ensure they can take advantage of proposals to allow people to exit the former without restrictions, an SMSF legal expert has suggested.

DBA Lawyers special counsel Bryce Figot said the recent consultation paper regarding the creation of a five-year period to commute complying lifetime pensions, older-style MLPs and life expectancy pensions did not indicate a start date for the proposed changes, but pre-emptive action could be taken already.

“What do advisers need to tell their clients now in order to cover for the possibility of death before the changes take effect?” Figot told attendees of a recent webinar the law firm hosted.

“There’s no telling if and when this will take effect, so consider converting entirely to a [new] MLP now as at least there will be no reserve concessional contribution issues,” he added, referring to plans to remove taxes on the allocation of reserves.

He noted any restructure of legacy pensions could cause flow-on effects, which had to be considered in any decision about moving out of them.

“If you do restructure a pension, it is almost certain there will be less exempt current pension income,” he added.

“If we’re talking about a big fund, and some of these old legacy pension funds are big with many millions of dollars, that could be a big deal, so do some analysis to see how much extra income tax the family group is going to pay.

“Also, if you restructure, succession planning will need to be considered, particularly if the pension had a reversionary beneficiary named.”

He also explained the proposed changes currently will not apply to any grandfathered social security arrangements, which will not transition over to a new pension.

“I really want to emphasise this. For some people with these pensions, social security is a really big issue and even for some really rich people who may not be receiving the age pension, they might have the thing they love most in the world – the Commonwealth Seniors Health Card.

“These changes could impact these cards so if your client is receiving some or all of the age pension and/or has a Commonwealth Seniors Health Card, be very careful before implementing changes.”

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