Essentially the new rules provide elegant solutions for two problem scenarios.
Legacy reserves, distributed to remaining members, will now be counted against non-concessional rather than concessional caps. If the member is eligible to make non-concessional contributions, including the ability to utilise the three-year bring forward rule, any amount distributed will utilise their contribution eligibility in the usual way.
If, due to age, they are not eligible to make non-concessional contributions they will still be able to use the $120,000 yearly cap, however, if the original pension recipient, or reversionary beneficiary, is the recipient of the distributed amount it is not subject to any cap at all.
Existing legacy pensions can be commuted in full. Any reserve will pass to the member’s accumulation account without penalty. The transfer balance cap debit will depend on the type of pension commuted.
For example, a lifetime complying pension will reduce the member’s transfer balance account balance by the same amount that it added to the account on 1 July 2017. A market-linked pension is subject to a more complex formula which is generally its 1 July 2017 TBA credit less subsequent pensions drawn.
It must be noted that the issue of Centrelink asset test exemptions has not yet been finalised.
Technically, legacy pension commutations will lose their asset test exemption and could incur a five-year clawback of social security entitlements if commuted under the new regulations, but the assistant treasurer has stated in a media release:
As announced by the former government in the 2021–22 budget, social security treatment will not be preserved for those who choose to transition out of their legacy retirement product. However, no debts will arise from the re‑assessment of these products’ asset values for the period before conversion.
This means that Centrelink benefits will not be assessed retrospectively but they will be tested from the date of legacy pension commutation and could result in a loss of benefits.
Lastly, the regulations still need to pass a “disallowance period” of 15 sitting days in parliament. As such there is a possibility the regulations could cease in the event of a successful notice of motion to disallow during that period, however, it is unlikely that a motion to disallow will occur. In the unlikely scenario of a successful motion to dismiss, the law would cease to apply only from that time and not retrospectively, so it is prudent to act now.
