Author: Emma Partenza, Senior Manager, TAG Financial Services
As announced in the May 21-22 Federal Budget, the former Federal Government proposed an exit strategy for members currently holding outdated pension products, which covers the inflexible lifetime complying pensions, market linked pensions and life expectancy pensions.
Since that Budget, this matter has largely gone under the radar, and retirees have essentially been stuck in these products waiting for progress to be made, unable to manage them.
Many in receipt of these complex and inflexible pensions have neared their life expectancy, have minimal balances remaining in them or are experiencing liquidity issues. These pensions could only be commenced prior to 20 September 2007 (or commuted since into other legacy products where the initial pension commenced prior to this time) and decades later, many members retirement needs have changed.
Draft Regulations
Finally, in September, draft regulations were released – Treasury Laws Amendment (Self-managed superannuation funds – legacy retirement product conversions and reserves) Regulations 2024.
Why?
The objective of the draft regulations is to address the current restrictions on commutation of these pension products and to provide superannuation funds with greater flexibility in the allocation of reserves.
What is proposed?
The Government is proposing to allow members to exit these legacy retirement products for up to 5 years. Commutation restrictions will be relaxed, to be able to commute these pensions and allow members to either:
- Commute and commence an account- based pension with the capital of the legacy pension;
- Commute and leave the capital in the member’s accumulation benefit in the fund; or
- Commute and withdraw the monies from superannuation (and in some cases, then be able to wind up their SMSF).
Trustees and members will have five years to effect this (from date the regulations become law), so it will be imperative for them to act and obtain financial advice early on so there is sufficient time to implement strategies appropriate for them.
Members are not required to exit these pensions, and may not do so for Centrelink purposes, as commutation into other pension products will have implications to deeming of income and could significantly change their eligibility, or the capital could become assessable under the assets test.
Exiting these legacy pensions can only be done in full. I.e. part of the legacy pension cannot be commuted and part of it remain behind. It’s all or nothing.
The other proposal relates to the reserves of the fund and allowing more flexible pathways regarding allocations from them. Currently any allocations from reserves are counted towards a member’s concessional contribution cap. It’s proposed that allocations will now be assessed against the member’s non-concessional contribution cap – allowing far greater allocations to be made to members out of the reserve and accelerate amounts moving out of the reserve.
In addition, where a legacy pension has previously ceased, having left a reserve behind (and no longer serving a purpose), the allocation from that reserve to the member who held that ceased pension, will not be assessable against both concessional and non-concessional contribution caps.
Applicable pension products
- Lifetime complying pensions;
- Life expectancy pensions;
- Market linked income streams.
The benefit?
Removing barriers preventing the exit and closure of such pensions is an extremely welcomed measure, giving members greater control and flexibility over their retirement income by exiting products that are no longer suitable to their needs and circumstances.
It will also reduce significant complexity and cost by having to remain in them and members can better structure their financial arrangements to better suit their needs. It appears exiting these pensions will not provide member’s any adverse consequences in doing so.
Not yet law
It is important to note these regulations are not yet law. Currently nothing can be done until Royal Assent is received. However, it would be advantageous for trustees to start obtaining financial advice regarding these proposed measures.
If you have any further questions don’t hesitate to reach out to us! Email us at super@tagfinancial.com.au or give us a call on 03 9886 0800.
More information
If you have any further questions don’t hesitate to reach out to us! Email us at super@tagfinancial.com.au or give us a call on 03 9886 0800.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2024. Please do not reproduce without the expressed written consent of the author.