“Where the flexi-pension has been commuted in full, the trustee may, subject to the deed, allocate the excess amount from the reserve to all the members of the fund in a reasonable manner, and any allocation above the five per cent amount is to be treated as a concessional contribution cap,” Mr Butler explained.

While there is no express materials from the ATO which explain its position in relation to lifetime pensions, based on recent discussions with the ATO, Mr Butler said the ATO will also take this position where a trustee commutes their lifetime pension or their flexi-pension.

“That means the reserve that’s left over can be applied to other members of the fund, subject to that five per cent rule,” he said.

There has been concern among SMSF practitioners and trustees, he said, that where one of these pensions has been commuted, it will result in a reserve amount becoming trapped because of the way the regulations operate.

“[However], the ATO has said that you can allocate that across to members in a fair and reasonable manner where it doesn’t exceed that five per cent amount, and it won’t count towards your concessional cap,” he explained.

“Given this clarity from the ATO, people with these pensions should really take stock and work out whether it’s the right time to move across to a more modern form of pension,” he said.

It may be best to deal with these pensions now he said for the estate planning implications.

“People with these pensions are getting older and if they do pass away, then what’s going to happen with their pension and their reserves if they have a defined benefit pension?”