Accurium’s actuaries working to support clients with legacy pensions
Government released on 17 September 2024 Treasury Laws Amendment Instrument 2024: Self-managed superannuation funds—legacy retirement product conversions and reserves: Legacy retirement product conversions and reserves – draft regulations | Treasury.gov.au
Our Senior Actuary, Melanie Dunn, is Chair of the Actuaries Institute SMSF sub-committee which led the submission to Treasury from the Actuaries Institute. She said ‘Put simply, these draft regulations are what we’ve all been waiting for in respect to dealing with legacy pensions in an SMSF, and what’s great is that the changes will become law the day after the instrument is registered. The ageing demographic of persons with these legacy pensions, the potential introduction of Division 296 tax from 2025-26, and the general complexity of dealing with these products, all mean the draft regulations deliver welcome flexibility for SMSF trustees, and I hope the final Regulations will be implemented as soon as practicable.’
The draft regulations apply to lifetime, life-expectancy and market-linked pensions in an SMSF. Currently these non-commutable income streams offer little flexibility for members. Members in receipt of these pensions are mostly now in their mid to late 80s meaning trustees face challenges and red tape with estate planning and SMSF administration. Further, when members pass away and the pension liability ceases the reserve supporting a defined benefit pension is generally not available to be paid as a death benefit which can be unexpected for beneficiaries.
Melanie noted ‘The draft regulations would enable the full commutation of legacy income streams over a five-year period. Members could exit these complex products, and the commutation value could, subject to cashing restrictions and personal transfer balance caps, be retained in accumulation, be used to commence an account-based pension, or be paid out of super. Members would however likely lose any Assets Test Exemption (ATE) upon commutation. Further, paying out reserves left over from when one of these pensions previously ceased would become more manageable with allocations assessed against a member’s non-concessional contribution cap instead of the concessional cap.’
Clients with legacy pensions should be encouraged to seek advice in respect to the options available to them and the impact of any commutation on their personal circumstances. This is a complex and niche area of advice and in some circumstances ‘doing nothing’ can lead to poor client outcomes, especially in respect to estate planning.
Melanie noted, ‘Legacy pensions are complex and having dealt with the requirements of these pensions over many decades, Accurium’s team are at the forefront of technical expertise when it comes to understanding and dealing with these income streams.’
‘We are expanding our current actuarial advisory services to incorporate the impact of the draft regulations. We are ready to assist you understand the options available to commute a legacy pension, and the implication of doing so, on a member’s transfer balance cap, access to benefits and social security. Including any necessary actuarial calculations of the fair and reasonable commutation value where a pension reserve is supporting more than one legacy pension.’
Overall, the draft regulations are well considered and will enable welcome flexibility for dealing with legacy pensions. Melanie however did identify ‘There are some important considerations we would be keen to see addressed by Treasury to ensure there are no unintended consequences. This includes determinations for social security purposes to ensure legacy pensions which are ATE will continue to retain their ATE status, and a debt relief waiver to ensure there is no clawback upon full commutation of a legacy income stream.’
The consultation period in respect of the draft regulations has now ceased. You can view the Actuaries Institute submission here: Consultation: Legacy retirement product conversions & reserves – Draft regulations (actuaries.asn.au)
Accurium will keep you updated on the progress of the draft regulations, you can subscribe to our mailing list here.
Find out more about Accurium’s consulting service here and our defined benefit pension actuarial certificate service here. You can also enquire about our legacy pension conversion advice package by emailing Melanie and Greta at [email protected].
