Guidance ‘critical’ in legacy pension changes: FAAA

Last month, the government released the draft regulations for Treasury Laws Amendment (Self-managed superannuation funds—legacy retirement product conversions and reserves) Regulations 2024.

Treasury stated the objective of the regulations is to address the current restrictions on the commutation of legacy pensions and to provide funds with more flexibility for the allocation of reserves.

The regulations relax commutation restrictions so that legacy products can be exited with the resulting capital used to commence an account-based income stream, left in an accumulation interest account or withdrawn from superannuation entirely, but must occur in full within a five-year grace period beginning on the day the regulations commence.

They also provide more flexible pathways to make allocations from a reserve by providing that where a reserve supports a ceased income stream and is allocated to the former recipient of that income stream, it will be exempt from both contribution caps.

In its submission to a consultation on the draft regulations, the Financial Advice Association Australia (FAAA) said it “strongly supports the objective” of the changes.

“We are aware that there are many Australians stuck in pre-20 September 2007 retirement income products who are unable to exit due to limitations with the rules that applies to these products,” it said.

“As a result, there are many Australians who either have unnecessary complexity in their superannuation arrangements or are forced to keep an SMSF open even when this is no longer appropriate or where they no longer have the capacity to operate an SMSF.

“Equally, we are very supportive of the mechanism provided for the release of reserves, which is an arrangement that is not required under modern products. This legacy product issue is another factor adding complexity and preventing the closure of SMSFs.”

However, the FAAA has cautioned that because the legacy products are so outdated, it could be difficult for consumers to access advice on the topic, even with the five-year time frame provided.

“In the case of commuting an existing legacy income stream product, allocating reserves and closing an SMSF, this can take considerable time. It is also, in many cases, going to require access to financial advice and other professional services,” the submission said.

“Access to financial advisers with the expertise relevant to these legacy products (pre-20 September 2007) might be challenging, necessitating a reasonable period of time. We encourage the government to be open to consideration of an extension should complications arise that reduce or delay the uptake of this important measure.”

In order to help smooth the process, the association also pushed for greater guidance from the Australian Taxation Office (ATO).

“Given the complexity in exiting these products and the expected difficulty in getting access to financial advice on this measure, we believe that other forms of communication with impacted SMSFs and the provision of guidance by the ATO to financial advisers, accountants and trustees is critical,” it said.

The FAAA added: “We recommend the inclusion of examples in the explanatory statement to assist trustees and practitioners to understand how this measure will work in practice. These are complex arrangements and the risk of making a mistake are significant. Clear guidance is essential.”