A long-awaited measure allowing clients with super legacy pensions such as market linked, lifetime complying or life expectancy complying pensions, to exit these restrictive income streams is now law.
Comprising two components – commutation reform and pension reserve reform – these changes give clients the ability to exit these inflexible arrangements and fully commute them, including any associated reserves.
Five-year amnesty to commute existing legacy income streams
Beginning 7 December 2024, commutation restrictions have been relaxed for five years. During this time, members can commute their existing legacy income stream and:
- roll back proceeds into accumulation phase
- rollover funds to commence a new retirement phase income stream; or
- withdraw the funds from superannuation altogether.
The amnesty applies to legacy pensions and annuities that meet the definition of a non-commutable lifetime1, life expectancy2 and market-linked3 income stream.
Better treatment of allocation from non-pension reserves
Prior to new regulations effective from 7 December 2024, allocations from a fund reserve arewere often counted towards a member’s concessional contribution cap. To avoid an excess, trustees would generally allocate small amounts of the reserve each year to members’ accounts through ‘fair and reasonable’ allocations. This sometimes resulted in large unallocated reserves that were effectively ‘stuck’ in superannuation as members could generally access only small allocated amounts over time.
The new regulations ensure that where a reserve supported an income stream (i.e. 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 or non-concessional contribution cap – that is, the allocation can be made via a new cap-free pathway.
For allocations from other (non-pension) reserves, the regulations ensure that all other reserve allocations will now count towards an individual’s non-concessional cap. This change to managing reserve allocations is not subject to the five-year amnesty —the rules are the ‘new norm’ for all reserve allocations moving forward.
The cap-free pathway is beneficial in circumstances where the reserve allocation is made whilst a pension recipient is still alive. It does not apply where the former pension recipient has passed and a ‘pension reserve’ exists.
For example, Anna passed away and the nominated beneficiary on her life expectancy pension was her spouse, Richard. He elected to commence an income stream using the proceeds of Anna’s death benefit. If pension reserves are allocated to the death benefit income stream paid to Richard, these amounts will count towards his non-concessional contributions cap unless he chooses to allocate them against his concessional cap each year through ‘fair and reasonable’ allocations.
Social security
At the time of writing, we are not aware of any social security legislative measures that address the social security outcomes of these changes.
Specifically, the regulations do not address how the commutation of Asset Test Exempt (ATE) income streams (under s9A (ATE lifetime); s9B (ATE life expectancy) and s9BA (ATE market linked) of the Social Security Act 1991 (and the service pension equivalents under the Veterans’ Entitlements Act 1986) will be treated.
Currently, the commutation of these income streams contrary to the conditions specified would cause the income streams to be non-ATE and trigger a retrospective reassessment of the pensioner’s age pension entitlement for the previous five years on the basis the income stream was not asset test exempt. In some cases, this can give rise to an overpayment of their entitlement and potentially create a Centrelink debt.
Addressing this, there is some indication that changes are on the horizon as the Assistant Treasurer, Stephen Jones issued a media release on 14 December 2024 stating:
“… social security treatment will not be preserved for those who choose to transition out of their legacy retirement product. However, no debts will arise from the re‑assessment of these products’ asset values for the period before conversion.
Individuals who want to exit their legacy retirement product should consider seeking financial advice before taking action.”
We continue to monitor these changes and will provide an update should further legislation or a Ministerial Determination be released. More information on the Regulations can be found by visiting Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024.