SMSF trustees who have noted the proposed changes to allow people to exit legacy pensions do not include flexi-pensions can still exit them as the issue of reserves, which would have still locked the benefits within a fund, has also been resolved, an SMSF legal expert has pointed out.
DBA Lawyers special counsel Bryce Figot noted the consultation paper released by Treasury on 17 September outlining proposals to create a five-year period to exit legacy pensions did not specifically mention flexi-pensions.
“The draft regulations said for a five-year period, not the two-year period we were first told about, you will be able to commute complying lifetime pensions, market-linked pensions and life expectancy pensions,” Figot said during a recent online briefing.
“Flexi-pensions are not covered, but that’s okay because you can still commute a flexi-pension anyway, it just leaves the money in the fund’s reserves. Don’t worry, they have given a solution for reserves, which will also apply to flexi-pensions.
“So while they are not expressly covered, reviewing the fine print states there is good news for those with flexi-pensions because they’re still going to be covered by these changes.”
He pointed out there would be no tax on exiting reserves, but they would be counted towards non-concessional contribution caps and would apply to almost every form of reserve held within an SMSF, including those linked to a flexi-pension.
“There is no tax per se on exiting reserves, which is good as previous proposals had a tax on exiting reserves and under this consultation, reserves are also no longer going to be seen as concessional contributions, unless it is a Division 7.2, that is, a contribution reserving strategy.
“So you can’t use this with assessable employer contributions and put them into a contribution reserve and allocate them out and say it’s not subject to that 15 per cent contributions tax, but all other types of allocations from a reserve, including an old investment reserve, are not going to constitute a concessional contribution anymore.
“I say this is good news if you have a large reserve for other reasons too, for example, from an old investment reserving strategy or an old anti-detriment strategy, which are becoming obscure, but they are out there.
“Instead, we will just need to think about whether the allocation is a non-concessional contribution and what happens if we have an excess non-concessional contribution. It’s not diabolical. It just means you’ve got to pull money out of super, which is not ideal.”
