The SMSF Association has welcomed having the five-year amnesty for legacy pensions passed into law, describing it as a much-needed reform for individuals, who until now have been trapped in these income streams for too long.
According to Treasury, there are more than 16,900 legacy pensions in existence, including legacy lifetime, life expectancy and market-linked income stream products.
“These new regulations offer an escape route by providing [superannuants in them] with a five-year timeframe to exit these pensions, while providing more flexible pathways to allocate benefits tied up in reserves,” SMSF Association chief executive Peter Burgess noted in a blog post on the industry body’s website.
Specifically, the measures, ushered in via the Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024, grant super fund members with these structures a five-year window to exit them with the ability to use the remaining value of the pension to commence an alternative income stream, keep it in an accumulation interest or exit it from the superannuation system.
“Not only will this allow individuals to exit obsolete products, but it removes a barrier that has prevented some members from winding up SMSFs that are no longer suitable for their circumstances,” Burgess said.
Exiting these income streams will require a full commutation, but the SMSF Association has lobbied for and would prefer to see partial commutations allowed as well.
The industry body also welcomed the ability the amnesty has granted to extinguish reserves supporting legacy pensions.
“These regulations provide that where a reserve supported an income stream (that is, a pension reserve) and that income stream has ceased or been commuted and the reserve is allocated to a former recipient of that income stream, including a reversionary beneficiary, the allocation will not be counted toward their concessional nor non-concessional contribution cap – that is, the allocation can be made via a new cap-free pathway,” Burgess explained.
“And, for allocations from other (non-pension) reserves, these regulations ensure that all other reserve allocations, which were previously counted towards an individual’s concessional contributions cap, will now be counted towards their non-concessional contributions cap.”
The changes to the tax treatment applied to reserves are not subject to the five-year timeframe and will now be the conventional treatment for all reserve allocations made on or after 7 December 2024.
However, Burgess did recognise a downside to the reserve treatment as well.
“While it will be beneficial in circumstances where a reserve allocation is made to a pension recipient that is still alive, it will not be available where a ‘pension reserve’ exists, but the former pension recipient(s) has died,” he said.
“For example, when a life expectancy pension’s term ends, the pension ceases. The resulting reserve amount associated with the pension remains in the fund – awaiting allocation to a member account.
“Under these new regulations, should the reserve allocation be made to someone other than the pension recipient – for example, the pension recipient has subsequently died – the cap-free pathway is no longer available.”
He warned people would have to move quickly to make use of the amnesty if the Division 296 tax was introduced due to how legacy pensions are accounted for in the calculation of the impost and that the social security implications of the measure were yet to be fully understood.
