SMSF members holding legacy pensions should exit them as soon as possible if proposed draft regulations around their treatment become law as there is no rational reason to remain in them any longer, a superannuation lawyer has suggested.
Townsends Business and Corporate Lawyers superannuation special counsel Michael Hallinan said those holding legacy pensions should look at making use of draft regulations to allow exits from them if they become law, given it would be the most substantial shift in policy in this area.
“I am absolutely surprised the government are running with the changes because I thought they did a review of all previous announcements which have not been enacted and can’t recall legacy pensions being an issue they would continue with. I thought they had been dropped,” Hallinan told selfmanagedsuper.
“A few months ago the starting position was you are stuck with them and now you have a five-year window to make the decision to exit or retain them.
“I can’t think of a rational reason to retain them except if there were asset-test-exempt status issues.”
He also believed the government was being generous in its application of tax on commuted pensions and reserves, which was an added incentive to exit them.
“Having a five-year opportunity to exit these products is great, but if you are the primary pensioner, you can exit them and not just the commuted value, but also the value of any pension reserve comes out essentially as a tax-free amount,” he added.
“This is a similar provision to that proposed by the previous government, but they never got around to it. Yet this government, which you would have thought was the least sympathetic to people in these pensions, have bitten the bullet to allow them to get out almost on a very generous basis.”
He acknowledged the lack of grandfathering of the asset-test-exempt status would be an issue for some people, but that was likely to be small group and exiting legacy pensions should be a straightforward process.
“Most of the legacy pension products in the SMSF space are market-linked pensions and it does not take much to commute those, work out the account balance and make a decision whether you retain the amount in the system or take it out of cash,” he said.
“I really can’t think of a good reason if your clients are in a position to utilise these regulations, why they wouldn’t.
“The question is not whether they should get out, it is whether there is a rational reason for them to retain the product.”
