Amongst the drama from the last sitting days of parliament we nearly missed that a Regulation the SMSF industry has been waiting on was quietly registered by Stephen Jones, Assistant Treasurer and Minister for Financial Services, and its BIG NEWS for anyone with a legacy pension. 

The Regulation Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024 came into effect from 7 December 2024. 

Who is affected? 

• Pensioners in receipt of a lifetime defined benefit pension, life-expectancy pension or market-linked pension 
• Members who previously restructured their defined benefit pensions and were left with an unallocated reserve in the Fund 
• Members who previously restructured their defined benefit pensions to a market-linked pension  
• SMSFs where there is an unallocated reserve in the Fund but the pensioners who were in receipt of the pension have passed away 

What is the change? 

The new Regulations provide a 5-year window of opportunity, which commenced on 7 December 2024, allowing a member with either a lifetime defined benefit pension, a life-expectancy defined benefit pension, or market-linked pension, to fully commute that pension back to accumulation phase in the SMSF. This amount can then be used to commence an account-based pension, subject to the member’s transfer balance cap. The amount can also be retained in the member’s accumulation account or withdrawn from superannuation. 

Further, where a member previously restructured their legacy defined benefit pension, and this resulted in an amount remaining in an unallocated reserve of the Fund, the amount remaining in the reserve can be allocated to the original pensioner without that allocation being assessed against their concessional or non-concessional contribution cap. This applies to allocations made from December 7 and is not subject to the 5-year window. 

Finally, where a Fund contains an unallocated reserve, and the original pensioners are all deceased, allocations from the reserve which do not meet one of the ‘cap free’ pathways in the Regulations will be assessed as non-concessional contributions instead of as concessional contributions. This also applies from December 7 and is not subject to the 5-year window. 

Why is this good? 

These regulations provide members and their families with much greater flexibility to manage or wind up their SMSF, reduce administrative costs of the fund as legacy pensions can be time consuming to administer, and enable the payment of death benefits as part of estate planning strategies. 

Best of all, the Regulations are law from 7 December 2024.  

The Regulations still need to pass a ‘disallowance period’ of 15 sitting days in Parliament. Our best estimate of when this period might finish would be 14th April for House of Reps and 13th May for the Senate, although if an election is called prior the expiration of this period, it would be paused until the new Parliament reconvenes.  As such there is a possibility the Regulations could cease in the event of a successful notice of motion to disallow during the period.  

We expect it unlikely that a motion to disallow will occur, however if a successful motion did occur the law would cease to apply only from that time and not retrospectively.  

You can act NOW with confidence the Regulations are law, even though they could potentially become disallowed at a future date. 

What’s the catch? 

Of course, there are considerations and complexities to work through with members, but overall, this is a very welcome change for members who have or had a legacy pension in their SMSF. 

There does remain a concern for asset test exempt (ATE) legacy pensions with the change in Regulations which have not yet been addressed at this time. The change in Regulation means technically legacy pensions may have lost ATE and could incur a five-year claw back of social security entitlements if commuted under the new Regulations. 

We are expecting the Assistant Treasurer to confirm shortly the social security means testing implications of the new Regulations, and we understand Treasury are working closely with the Department of Social Services and Department of Veterans’ Affairs to ensure the issues raised above are resolved. 

What next? 

The new Regulations are a game changer. Practitioners working with SMSFs should review their Funds for any which have a defined benefit pension, or market-linked pension, or which has unallocated reserves from a ceased defined benefit pension.  

For many members who are or were in receipt of a defined benefit pension or market linked pension the new Regulations provide an opportunity to exit these legacy income streams. Practitioners should ensure members understand the impact of doing nothing and retaining their existing legacy pension versus acting under the new Regulations, to make an informed decision about their pension. 

Accurium have decades of experience assisting clients with legacy pensions. We understand the complexities of these income streams and stand ready to assist you and your clients understand and take advantage of the new Regulations.  

Accurium legacy pension services 

Our services are delivered by our experienced actuarial and superannuation team to assist you with advice on the options available for restructuring your client’s SMSF legacy pensions, or/and distributing pension reserves to members. 

Legacy pension restructure report  

This report assists you with advice on the options available for your SMSF legacy pension client and will cover: 

• Consequences on death if no changes are made, including potential tax implications 
• Options for restructuring under the 5-year exit measure, including fair and reasonable commutation values, tax and transfer balance account implications  

Distribution of pension reserves report  

This report assists you with advice on the options available for distributing a reserve to members: 

• Entitlement for and implication of using cap free pension reserve allocations 
• Options for distributing reserves and tax implication of using the 5% rule, ‘pay it all now’, and non-concessional contribution cap, reserve allocation strategy 

Documentation 

We can also assist with the preparation of minutes and pension documentation to affect the commutation of the legacy pension, reserve allocations, and commencement of new account-based pensions. 

For a no obligation discussion, please contact us and we can provide you with a fixed fee quote for your SMSF client’s scenario.  

Call us on 1800 203 123 or email us at [email protected].