“These measures are effective from 7 December 2024 and apply to the ability to commute certain legacy pensions. Those legacy pensions are defined as three particular types,” he said.

“One everyone will know or understand is market-linked pensions, which are in their construct an account-based pension. The second two are lifetime or complying lifetime pensions, and then complying life expectancy or complying fixed-term pensions.”

Miller said previously these types of pensions were non-commutable but are now fully commutable for a period of five years.

Aaron Dunn, CEO of Smarter SMSF, added that prior to the new regulations market-linked pensions were unable to be utilised as a fresh income stream since September 2007, while defined benefit pensions went back to December of 2004-05.

“We’re really looking at pensions that have been in operation for a long period of time,” he said.

“There may be circumstances where individuals changed a lifetime pension or a life expectancy pension into a market-linked pension post-September 2007 and now they don't get excluded in this [regulation] off the back of the fact that they were established in their original term prior to that 2007 cut-off date.”

Miller added that if the pensions, in their original format, were commenced prior to 2007 that if they have been commuted for another “like” pension after that date, then they still count as a legacy pension and can still be commuted.

“The truth behind a lot of the pensions is they all started in and around that 2002 to 2004 period before the rules changed around the 100 per cent asset test exemption and a lot of them have reached the end of their term,” he said.

“If you got to the end of the life of that pension - life expectancy or term - you could end up in a situation where you have residual or reserves and one of the problems that have existed with the use of reserves and challenges with trying to clear out reserves in the SMSF environment has been the fact that the amount that you can allocate has been quite restrictive by the 5 per cent allocation as well as the alignment to the concessional contribution cap.”

Miller continued that previously the basis behind lifetime and life expectancy pensions was once they were commenced, the money was ultimately set aside for actuarial and calculation purposes to be able to fund that pension for the lifetime or for the term.

“There was this concept that the money no longer belonged to the member. It effectively sat in a reserve and it was there exclusively for the purpose of paying an income stream and once that income stream ceased, that money didn't belong to anybody,” he said.

“That led to this issue, where once the pension had stopped, the money was then unallocated, and you had to go through all sorts of mechanisms to make allocations. You had to do it on a fair and reasonable basis less than 5 per cent of all members’ balances to ensure that that money wasn't counted towards the concessional contribution cap.”

He said what the new regulations have done is expanded the concept around reserves and states that if the reserve has ever funded a pension for the member, then it is a pension reserve for all intents and purposes.

“Even if that pension has ceased, as is the case with these fixed-term pensions, if that original pensioner is still alive, then under this new allocation mechanism an allocation can be made from the reserve without counting towards any members’ caps,” Miller continued.

“So, we can make from a complying lifetime pension or a former fixed-term pension a full allocation to the pensioner without there being any cap considerations whatsoever. That is the significant benefit of these reserve allocations as a bit of a subset from what we previously had.”

He said in addition there is a further change for those that don't meet that critical condition that the original pensioner is still alive.

“If the pensioner is no longer alive, and they're looking to allocate to other members of the fund, or there are reserves for other purposes you can now make allocations to all the members of the fund, or specific members of the fund,” Miller said.

“If you don't do it on a fair and reasonable basis, if you don't do it to less than 5 per cent of their member balances or their interest, then these allocations will count towards the non-concessional cap versus the concessional cap, so it provides for a far greater capacity to exhaust these larger reserves by making allocations, potentially up to $360,000 per member versus $30,000.”