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the resulting capital used to commence an account-based income stream, left in an accumulation interest account, or withdrawn from superannuation entirely, but must occur in full within a five-year grace period beginning on the day the regulations commence.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.

Peter Burgess, SMSF Association CEO, said the draft legislation covered most of the issues with which the industry was concerned and delivered more than was expected.

“We’ve never seen such a positive set of regulations for the industry,” Burgess said.

“The concept of a legacy pension amnesty was first put forward by the SMSFA in 2019 and has remained a key feature of our policy platform ever since, so we welcome the release of these exposure draft regulations.

“It's particularly pleasing to see that reserve allocations from the ceased pension will be exempt from both contribution caps, which is something we have strongly advocated for since the amnesty was first announced by the Coalition government in the 2021 federal budget.”

He noted other reserve allocations will count towards the individual’s non-concessional contributions instead of their concessional contributions.

“This was an unexpected positive development but begs the question, why not exempt all reserve allocations from the contribution caps?”

“Overall, these exposure draft regulations are a very positive outcome for the industry and make good sense given the proposed introduction of Division 296 is likely to involve significant complexity and cost for individuals who remain in these types of pensions.”

The regulations will apply to legacy lifetime, life expectancy and market-linked superannuation income stream products that commenced before 20 September 2007 or were commenced as a result of a conversion of an earlier legacy product that commenced before that date.

The government stated that the new regulations will “relax commutation restrictions for a specified range of legacy retirement products and create a more flexible avenue for allocations from superannuation reserves”.

“This will allow individuals to exit products that are no longer suitable for their circumstances, remove barriers that currently prevent the closure of obsolete funds and legacy products, and allow for the allocation of reserves that no longer serve an ongoing purpose,” the explanatory notes read.

It continued that lifetime and life-expectancy products provide significantly less flexibility than more modern account-based income streams in terms of valuation and payment setting.

“Although market-linked income streams have similarities to account-based income streams, all these legacy products have broadly equivalent commutation restrictions. In practice, this means that the only way to voluntarily exit these products, prior to death or expiry of term, is conversion to another legacy product.”

“If an individual were to commute their legacy product without meeting one of the exceptional circumstances, it would result in tax and regulatory consequences.”

Melanie Dunn, principal and senior actuary for Accurium, said the draft regulations were more expansive than anticipated.

“We have five years potentially to exit these pensions in full, and there are provisions in there to allow the allocation from a reserve, so my initial review of it is very pleasing,” Dunn said.

Tim Miller, head of technical and education for Smarter SMSF, said it’s a “good news” piece of regulation with a focus on the ability for consultation.

“This is ultimately saying we are going to get rid of legacy pensions and people have the choice to put it back into account-based pension or accumulation,” Miller said.

“There are two separate pathways – one for those who may want to retain the legacy pension and one for those who want to commute the whole lot. Some people may choose to retain it for social security purposes.”

Meg Heffron, director of Heffron, said the draft regulations were “brilliant” and finally provide a framework for unwinding legacy pensions cleanly and simply for members who choose to do so.

“It seems amazing that six pages of legislation took this long to come about but at least we have something to consult about now,” Heffron said.

“For years now, successive governments have promised to make life simpler for members who were locked into this back at the turn of the century when tax rules were very different.”

Heffron said the new rules will essentially remove the requirement that a commuted legacy pension must be turned into another legacy pension and added the government is also proposing changes to flexi pensions.

However, she said there are some catches including the limited window of five years from when the regulations come into force and said this has the potential to create a class of people who “miss out” by not getting the right advice quickly enough to act on it.

The other catch, Heffron added, is that the draft regulations only remove the requirement to keep the commuted amount in the “legacy pension family” if the pension is commuted in full.

“In other words, even these new changes wouldn’t allow someone to keep half their market-linked pension in place and turn half of it into an account-based pension.”