The SMSFA said the measures already contained in the draft legislation go “some ways” to achieving the policy guardrails, noting that it is common practice for legacy pensions to cease, rather than be commuted, on the death of the primary beneficiary or the completion of the payment term.

“However, the Exposure Draft regulations do not provide a cap-free pathway for situations where a pension has ceased in such a manner and the pension recipient has died,” it stated.

“We encourage Treasury to consider the inclusion of a third option to allow a pension reserve to be exited from the superannuation system where the pension recipient(s) has died.”

It continued that, ideally, on the commutation or cessation of the pension, the regulations would permit the pension reserve to be allocated to the deceased member’s account and paid as a death benefit to the deceased member’s SIS dependants or their estate.

“This would ensure a range of circumstances could be addressed, including where there is no surviving spouse. It would also avoid the need for a beneficiary to become a member of an SMSF for the sole purpose of receiving an entitlement from the fund’s pension reserve,” it added.

The submission continued that while this policy development seeks to address those with significant wealth held in pension reserves, many pensioners do not have substantial wealth in reserves and need an urgent remedy.

“There are many examples of individuals who are trapped in an SMSF despite it no longer being a suitable vehicle. These include those with small balances where the annual cost to administer the fund exceeds the pension benefit received,” it stated.

“These pensions also present significant challenges for the legal personal representatives of members who step in as trustee where the member is no longer able to act as trustee of the fund. Indeed, issues also arise on the death of the member.”

The association also urged Treasury to finalise and table the regulations as soon as practicable noting that with the proposed introduction of Division 296, reserve allocations made on or after 1 July 2025 are likely to increase a member’s Division 296 tax liability.

“It’s critically important legacy pension recipients, and beneficiaries of fund reserves, are given an adequate amount of time before 1 July 2025 to restructure these pensions,” it said.

“The tabling of these regulations should not be linked to the passage of the Division 296 legislation, to enable members to act swiftly, and minimise the negative impact on members where the pension and/or the SMSF is no longer fit for purpose.”

Furthermore, the SMSFA asked that Treasury consider providing an additional ability to partially commute a legacy pension on an ongoing basis for those individuals who choose to continue receiving their legacy pension beyond the proposed five-year period.

“The existing framework for these pension interests is complex and challenging for many practitioners to interpret and apply. These amendments would therefore benefit from the inclusion of practical examples in the explanatory statement that clearly set out and illustrate the operation of these measures.”