For legacy lifetime, life expectancy and market-linked superannuation income stream products that generally commenced prior to 20 September 2007, the shackles have finally been released for retirees but care is still required.
The much-awaited Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024 (the amending regulations), that came into effect on 7 December 2024, allow thousands of self managed super fund (SMSF) members to exit legacy income streams at any stage until 7 December 2029.
This also applies to income streams that commenced after 20 September 2007 as a result of a conversion of an earlier legacy product that commenced prior to that date.
Prior to the introduction of the amending regulations, these legacy products – also known as non-commutable products – could not be converted to a lump sum, effectively trapping pensioners in their SMSF.
Although they have not been offered for almost 20 years, legacy products were originally introduced to offer retirees a guaranteed income for life or for a set term. Good in one way, but very restrictive strategically as the products could not respond to changing individual circumstances, market conditions and other legislative reforms.
During the five-year grace period that the amending regulations offer, retirees can exit these income streams without the previous heavy penalties and with the options of fully withdrawing their funds or moving them into a new income stream or an accumulation account.
According to the ATO, in addition to this increased flexibility, these changes allow for easier ways to make allocations from a reserve by:
There is further good news: the new reserve rules last indefinitely – not just for five years.
However, it may be prudent to not to jump in yet if a person's legacy pension was established for social security purposes. A new legislative instrument will ensure these pensions receive the proper treatment under the Social Security Act 1991.
If a person has already made some reserve allocations in 2024–2025 under the "old" rules, both the old and new rules will actually apply this year depending on when they made the allocation. But it’s important not to assume everything allocated in 2024–2025 is covered under the new rules!
Note also that SMSF members with a legacy pension may need to give the amending regulations consideration ahead of the proposed Division 296 rules from 1 July 2025 (if they are enacted in the currently proposed form). This is because Division 296 may count certain reserve allocations as part of the member’s superannuation earnings under the proposed additional 15% tax for super account balances above $3 million.
Source: www.ato.gov.au/about-ato/new-legislation/in-detail/superannuation/legacy-retirement-product-conversions-and-reserves
www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/super-funds-newsroom/changes-to-legacy-retirement-products