Regulations Provide Exit Path for Legacy Super Income Streams
Self-managed super fund (SMSF) members with legacy lifetime, life expectancy, and market-linked superannuation income stream products—typically established before 20 September 2007—now have a long-awaited opportunity to exit these restrictive arrangements. However, careful planning is essential to maximize the benefits of the recent regulatory changes.
New regulations, effective from 7 December 2024, grant SMSF members the flexibility to exit these legacy income streams at any time until 7 December 2029. Previously, these non-commutable products could not be converted into a lump sum, effectively locking pensioners into their SMSF with limited financial flexibility.
Understanding the Changes
Legacy super products were originally designed to provide retirees with a secure income for life or a fixed term. While offering stability, they also imposed strict limitations, preventing adaptation to personal financial changes, market fluctuations, or new superannuation policies.
The introduction of a five-year grace period under the amending regulations now allows retirees to exit these income streams without incurring the previously significant penalties. Individuals can choose to:
- Withdraw their funds in full;
- Transfer their funds into a new income stream; or
- Move their funds into an accumulation account.
Key Considerations
- Social Security Implications
While exiting a legacy pension may seem advantageous, those who originally established these pensions for social security benefits should proceed with caution. A new legislative instrument is expected to clarify how these pensions will be treated under social security law. - Transition Between Old and New Reserve Rules
If reserve allocations were made under the old rules during the 2024–2025 financial year, both the previous and new rules could apply, depending on the timing of the allocation. It is crucial not to assume that all allocations within the 2024–2025 period fall under the new framework. - Potential Impact of Division 296
SMSF members with legacy pensions should also consider the implications of the proposed Division 296 rules, set to take effect from 1 July 2025. These changes may classify certain reserve allocations as part of a member’s superannuation earnings, potentially triggering an additional 15% tax for balances exceeding $3 million.
Next Steps
Given the complexity of these regulatory changes, SMSF members should review their current pension arrangements and assess whether exiting a legacy super income stream aligns with their long-term financial goals. Engaging with a qualified financial adviser will ensure compliance with the new rules while optimizing tax and retirement planning strategies.
If you require assistance in evaluating your legacy pension or understanding the potential tax and social security implications, please contact our office for expert advice tailored to your situation.