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As we are here to support you with all things SMSF, we have partnered up with our good friends Accurium to get the inside scoop on the 5-year legacy pension exit measure opportunity and this is what they had to say…

Regulations now law

New Regulations apply from 7 December 2024 which implement the long awaited 5-year exit measure to allow an SMSF member with certain types of legacy pensions to commute their pension in full, that is, to completely unwind the pension. This measure applies to the following legacy pensions paid from an SMSF:

• Lifetime complying pension, paid in accordance with SIS Regulation 06(2).
• Life expectancy pension, paid in accordance with SIS Regulation 06(7).
• Market-linked pension, also known as a term-allocation pension, paid in accordance with SIS Regulation 1.06(8).

Whilst the measure does not apply to pensions paid in accordance with SIS Regulation 1.06(6), commonly referred to as “flexi pensions” there is path under existing law and the new rules regarding allocation of reserves to affect an exit from them.

The Regulations also offer new rules for the allocation from reserves. In particular, where the reserves resulted from the commutation of a legacy pension, and the original pensioner is still alive, the reserve can be allocated to that member in full.

For example, Steve age 79, is a member of the Big Retirement Super Fund, an SMSF. He is currently receiving a lifetime complying pension (LCP) of $95,000 per annum, which commenced back in 2003. The pension reserve supporting his LCP currently stands at $1.4m. In the event of Steve’s death, the amount standing to the pension reserve would not be available to be paid as a superannuation death benefit to Steve’s dependants. It would be retained in the SMSF in an unallocated general reserve, which could be allocated to other fund members, subject to the contribution cap rules (see below relevant changes). However, under the 5-year exit measure, Steve will be able to fully commute his LCP with the entire balance of the pension reserve being allocated to his accumulation account, with no income tax implications. Steve can now incorporate this retirement capital into his estate plan.

Let’s look at another example, Florence age 82, has a market-linked pension (MLP), that has a remaining term of 8 years. Her health is not great, and she is concerned about the potential amount of tax that her adult children will pay on the residual amount of her MLP when it paid upon her death. She would like to withdraw her balance now so that there is no tax imposed when withdrawn and when distributed to her adult children. The new 5-year exit measure will permit Florence to fully commute her MLP now, prior to the end of the term and withdraw it from super. Florence will need to consider the income tax implications of holding the MLP capital outside of super and also review her estate plan.

New rules for reserve allocations

In addition to the 5-year exit measure, the new Regulations also include a change in how allocations from a reserve are assessed for contribution cap purposes. Allocations made from December 7, 2024, will now be counted against the potentially higher non-concessional cap, rather than the concessional cap. Furthermore, if the reserve previously supported a legacy pension and is allocated to the original or reversionary pensioner, the allocation will not count against either contribution cap. These additional new rules are not subject to the 5-year restriction.

This is a great opportunity for those SMSFs with reserves that may be a result of:

• Previous SMSF member with a defined benefit pension who passed away and there was a residual amount of the reserve retained.
• SMSF member fully commuted their defined benefit pension and not all the capital was available or used to commence another complying pension, for example, an MLP. An amount was retained in a general reserve.
• The SMSF has any on the following reserves that are no longer utilised due to changes in the law:
  • Anti-detriment
  • Insurance reserve;
  • Self-insurance reserve;
  • Investment fluctuation

The revised allocation and contribution cap rules provide the opportunity for SMSFs to potentially deal reserves in a shorter time frame than allowed under the previous rules, without severe adverse tax implications.

Can these new rules be repealed?

It is also worth noting that 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 14^th April for House of Reps and 13^th 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, however, we expect it unlikely that a motion to disallow will occur. In the unlikely scenario of a successful motion to dismiss, the law would cease to apply only from that time and not retrospectively.

Given the next scheduled sitting day is not until 4 February 2025 and our estimate, mentioned above, of when the disallowance period would be expected to end, you can act NOW with confidence the Regulations are law, even though they could potentially become disallowed at a future date.

How can we help?

We have partnered with Accurium, a leading actuarial and SMSF specialist firm, to assist you and your clients take advantage of the opportunities available under the new Regulations.

Accurium’s experienced actuarial and superannuation team will be delivering a service to assist you understand 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
• Options for restructuring under the 5-year exit measure, including fair and reasonable commutation values, tax and transfer balance account implications.

The fee for this report and relevant documentation starts at $3,000 +GST. The final amount of the fee will depend on the type of legacy pension and whether the SMSF has multiple legacy pensions.

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

The fee for this report and relevant documentation starts at $2,000 +GST.

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. Where either of the above two mentioned reports have been requested, the relevant fee includes the associated documentation.

Please note that the reports will not include commentary or advice in relation to any potential ramifications to Centrelink entitlements. 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. 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. However, the Assistant Treasurer has confirmed in a media release:

As announced by former Government in the 2021–22 Budget, 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.

Further, 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 does Accurium need to prepare the report?

To assess the relevant SMSF client scenario and determine the relevant report requirements, Accurium may require the following:

• A copy of the SMSF’s latest annual financial statements. Where this is not the immediately preceding financial year, that is, 2023-24, and estimate of current member balances, if available.
• Confirmation of the SMSF’s name and ABN; trustee(s), including C.N. and name of director(s) where a corporate trustee.
• Transfer balance account (TBA) history for the relevant member(s). This includes the detailed TBA transaction report; confirmation of the member’s personal transfer balance cap (TBC) and confirmation of confirmation of the member’s capped defined benefit income cap, where applicable.
• Legacy pension documentation, including type of pension, when commenced and If not available, confirmation of legacy pension details.
• A copy of the most recent actuarial certificate where the legacy pension is a defined benefit pension. If Accurium provided this certificate, simply advise such.
• Any other information that you think may be relevant – g. estate planning considerations.

When can I expect to receive the report from Accurium?

Given the time of year, Accurium will be assessing and addressing requests in early January 2025. However, it is expected that that once all the relevant information has been obtained, Accurium will provide the report within 3-weeks.

Who can I contact at Seamless SMSF to help?

Monica, Oliver or Jacob in the BDM team would love to support you if you have any other questions or want to proceed with Accurium so feel free to contact them on #03 5266 3599  or [email protected].