Pensions, Superannuation

Legacy pension issues addressed

legacy pensions

The decision in this year’s budget to give individuals a two-year opportunity to commute legacy pensions has been well received by SMSF stakeholders.

The revised treatment of legacy pensions announced in the 2021 federal budget has been widely endorsed by the SMSF community, with the recognition more detail about the measure needs to be released.

The budget contained an amendment to the pension rules that will allow individuals with legacy pensions a two-year period in which they can opt to commute these income streams and roll the underlying capital, including reserves, back into their super fund’s accumulation account.

From there the person can choose to commence a new pension, draw down the amount as a lump sum or have it remain in the accumulation account. The amendment will apply to market-linked, life-expectancy and lifetime pension and annuity products.

SuperGuardian education manager Tim Miller welcomed the change.

“The fact that we got something [that is] a little bit more than the commutation rules around market-linked pensions is fairly promising,” Miller told smstrusteenews.

Further, he is of the opinion the two-year opt-in period is a sufficient time frame for SMSF members to decide on their desired legacy pension direction.

“The general consensus seems to be even if there is a small window of opportunity to get rid of these pensions, it would give people ample time to do so. Whether two years is ideal or not I don’t know, but I think it’s as good an outcome that can be expected given we’ve been pushing for it for some time,” he said.

“If you don’t know now that you don’t want it, then you’re probably not going to know in two years’ time.”

Accurium head of education Mark Ellem concurred the announcement was positive news for SMSFs, but was wary about the detail that is still to come.

“There are some issues that need confirming. Firstly, the fact sheet states the only products covered are legacy pensions that were first commenced prior to 20 September 2007. Now, for a number of SMSFs they may have started a new market-linked pension post 20 September 2007, so is it going to cover those products?” Ellem said in an interview with smstrusteenews.

“There’s the other issue about the treatment of the commuted reserve. While it won’t trigger excess concessional contributions, it will be taxed as an assessable contribution of the fund.

“The question is how the reserve is going to be defined for this purpose. We know how it’s defined for SIS (Superannuation Industry (Supervision) Act) [purposes], we know what a reserve is for tax purposes in relation to allocations from reserves, but what is going to be the definition of a reserve for this measure?”

SMSF Association deputy chief executive and policy and education director Peter Burgess revealed the changes are almost exactly what the industry body had been calling for.

“This is an initiative we had advocated for in our supplementary submission last year. We advocated for an amnesty period for SMSF members in these legacy pensions allowing them to convert to the more conventional style of income streams, such as account-based pensions, and we were particularly pleased to see the announcement in tonight’s budget that individuals will be able to so,” Burgess said.

He noted, though, the association’s position as to the treatment of the associated reserves differed from that contained in the budget papers.

“We argued that reserves really do or should form part of a member’s balance and shouldn’t be subject to tax on the way out,” he said.


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