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Treasury mulls fixes for legacy pension headaches

People having a discussion or meeting
By Miranda Brownlee
22 October 2018 — 2 minute read

With Treasury open to suggestions for resolving some of complications with legacy pensions, the Tax Institute has made a range of proposals, including a measure to allow the conversion of a legacy pension into an account-based pension.

In a submission to the government, the Tax Institute stated that the legislation, in relation to legacy pensions, needs to be revised in order to reduce the compliance burden and provide greater flexibility for members with these pensions.

While the submission acknowledged that only a relatively small number of members have these pensions, it said many of them are in their “twilight years” and have great difficulty in comprehending the complexity of the legacy products they now have.

In a previous meeting with the Tax Institute, Treasury indicated that it would be interested in hearing solutions to some of the reform issues affecting legacy pensions, according to the submission.

One of the solutions suggested by the Tax Institute is to allow members to convert legacy pension to an account-based pension (ABP).

“This may give rise to excess transfer balance cap (TBC) issues. We consider that legacy pensions should be allowed to convert to an ABP up to the amount of the member’s available TBC,” said the submission.

“This would occur via the current system of commuting the legacy pension, then commencing an ABP and being tested for TBC purposes.”

The submission also stated that any amount supporting a legacy pension that is in excess of the member’s transfer balance cap should be able to be commuted to form part of the individual’s accumulation interest.

“For example, a lifetime pension valued at $3 million could be converted into the following — a $1.6 million ABP and the balance of $1.4 million can form part of the individual’s accumulation interest,” it explained.

The submission said that where the legacy pension being commuted is a lifetime, fixed term or flexi pension, there may be reserves that support the provision of these pensions.

“In some cases, these reserves may be considerable particularly with some lifetime or flexi pensions,” the submission stated.

The treatment of amounts in excess of the commutation of a flexi pension should be modified, it stated.

The submission said that the legislation should be amended so that where a fund has a reserve supporting, or related to, a lifetime, fixed term or flexi pension that is converted into an ABP or accumulation interest, then the amounts in those reserves should be able to be converted into an ABP or accumulation interest without being counted for the member’s contribution caps.

An alternative option, it said, would be to allow reserves to be allocated to the member as a non-concessional contribution subject to the usual NCC caps but not the total superannuation balance limits.

A third option, it said, is to allow reserves to be allocated without counting for the contributions caps but only if they are paid as lump sums out of the super fund.

The submission also recommended that government should allow members to retain the Centrelink concessions regarding the assets test even when a legacy pension is converted into an account-based pension.

It also recommended that the Centrelink concessions regarding the “income test” be preserved when the legacy pension is converted into an ABP.

“Alternatively, where the legacy pension is converted to an ABP, we recommend that the ABP be concessionally treated as if it were started before 1 January 2015,” it said.

“Without this concession, it is likely that many members with such grandfathered legacy pensions would not take advantage of the ability to convert their pensions into ABPs. This would diminish the effectiveness of the new measure.”

Similar calls have been made from others in the industry, including Meg Heffron from Heffron SMSF Solutions, who suggested the government introduce an amnesty for those with legacy pensions to allow them to convert their pension to an ABP without severe tax penalties.

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