SMSF practitioners who have clients holding legacy pensions should act with caution, despite rules allowing them to be commuted taking effect from 7 December, as other problems could arise once the income stream is released.
Heffron managing director Meg Heffron suggested, while the new arrangements will be useful, it was worth waiting until the new year to take action when more guidance will be available, particularly around the interaction with social security rules.
“If your client’s legacy pension was put in place for social security purposes, hold fire. We are still waiting for an additional legislative instrument that will make sure they receive the appropriate treatment under the Social Security Act 1991,” Heffron said in a post on the firm’s website.
“While they will lose their asset test exemption moving forward, we need this instrument to ensure they are not also issued a debt notice, assuming that the pension counted for the assets test for the last five years.”
She added that where SMSF members had started unwinding a legacy pension under rules introduced in April 2022, the new arrangements were unlikely to change the final outcome of that process, but could speed it up, and warned people yet to commute that they should be properly prepared before doing so.
“Don’t be fooled. The new rules are simple, but there is still complexity in how some of the existing rules impact any wind-up,” she noted.
“For example, nothing has changed when it comes to the calculation of the commutation value of existing legacy pensions for transfer balance cap purposes.
“It’s not just the account balance [that should be considered]. For many people it won’t be possible to move the entire balance of their current legacy pension to a new account-based pension – there will be a transfer balance cap limitation.”
She pointed out while commutations could take place without any tax burden for the pension holder, it was necessary to look beyond that single transaction.
“The fact that legacy pensions can now be moved directly to account-based or accumulation accounts presents some new options in terms of optimising the tax components for beneficiaries,” she said.
“For some people, there might still be good reasons, in particular, exempt current pension income, for continuing the legacy pensions if only for a time. Don’t act too quickly.”
