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The role of reserves in legacy products
A critical feature of legacy retirement products is the use of reserves. When these products were initially set up, a portion of the capital was placed in reserve to cover potential future liabilities, ensuring a guaranteed income. Over time, these reserves could grow significantly, depending on investment performance. However, these reserves often became trapped within the superannuation system due to strict contribution cap rules, limiting how much of the reserve could be allocated to members.
The 2024 amendments also address this issue by providing a more flexible pathway for distributing reserves. Under the new regulations, trustees can allocate reserves to members without breaching concessional or non-concessional contribution caps, provided certain conditions are met. This change will help unlock unallocated reserves that have been stuck within the superannuation system, enabling members to receive the benefits more equitably and efficiently.
Flexibility in allocating reserves
Previously, if a reserve allocation exceeded certain thresholds, it could be counted towards an individual’s contribution caps, potentially resulting in excess contributions penalties. To avoid this, trustees would distribute reserves in small, titrated amounts, which often led to large sums remaining unallocated.
The new rules provide exemptions from contribution caps for allocations that are made when a legacy product is commuted. This means that, in many cases, reserves can be distributed more freely, giving members access to these funds without adverse tax consequences. In particular, if a reserve is used to pay off liabilities related to a ceased superannuation income stream, the allocation is exempt from both concessional and non-concessional caps.
This change offers substantial benefits for SMSF members holding legacy products, enabling them to exit outdated income streams and access capital more freely. Additionally, it simplifies the management of reserves, helping trustees and members manage their funds more effectively.
Conclusion
These draft regulations bring much-needed flexibility to the management of legacy retirement products within the superannuation system. By relaxing commutation restrictions and providing more pathways for distributing reserves, these regulations help retirees better manage their retirement savings in line with modern financial realities. For SMSF trustees and members, this represents a significant opportunity to optimise their superannuation strategies, freeing them from the constraints of outdated products and enabling them to make more informed, personalised decisions about their retirement.
These changes will provide greater financial flexibility, improve the efficiency of the superannuation system, and help individuals make the most of their retirement savings in a rapidly evolving financial landscape.
Consultation on the instrument is available up until 8 October 2024.
You can read more about these draft regulations on the Treasury website:
