Both this Government and the last promised to allow members with legacy pensions to escape them and still.. nothing in this year’s Federal Budget.
By “legacy pensions” we mean several different types of pensions (market linked pensions, complying lifetime pensions, complying life expectancy pensions etc) that can be traced back to the pre-2007 era. They are incredibly restrictive. Unlike modern account-based pensions they can’t be stopped at will, pay out large amounts or be easily transferred to another super fund.
People with particularly large super balances started them for tax reasons that are no longer relevant today. People with much smaller super balances started them for social security benefits – many of which are also irrelevant these days.
We’ve written extensively on these pensions for many years and championed a change that would allow members to wind them up without penalty. Unfortunately, we still have nothing.
The previous Government promised to provide a short term amnesty in which all legacy pensions could just be stopped (albeit there were some catches). The current Government committed to this same policy and has even reinforced its position in previous Federal Budgets. While we understand the amnesty is still on the agenda (confirmed in the budget lock up) in this year's Federal Budget .. nothing.
So it does beg the question – where are we now with these pensions?
A key thing to remember is that some people with legacy pensions (particularly large ones) can already make highly beneficial changes, potentially even winding them up. Doing so just involves paying some extra tax and can be complicated, requiring advice. And unfortunately not everyone has the same options – some people still can’t do anything at all.
So it pays to investigate all legacy pensions now to see whether it’s already possible to do something about them. Given that they didn’t even rate a mention in this year’s Federal Budget, it doesn’t seem worth waiting for the long promised amnesty.
There are some extra drivers to take action now for legacy pension members who are also facing extra taxes under the proposed Division 296 tax (the special tax for people with more than $3m in super from 2025/26).
Firstly, some of these legacy pensions come with “reserves”. A good example here is a pension known as a “complying lifetime pension”. Many older members who have pensions with reserves are already trying to get rid of them because there are major challenges when someone dies while their pension is still running. In a nutshell, the “reserves” can’t easily be paid out to beneficiaries leaving some of the super trapped inside the super fund.
When these pensions are wound up during the member’s lifetime, the reserves are usually put into a member’s account as part of starting a new pension. Currently there’s no penalty for doing this but all that will change when Division 296 comes in.
Importantly, Division 296 tax is levied on a proportion of the “earnings” added to the member’s account during the year. Reserve amounts added to the member’s account as part of winding up a complying lifetime pension will be treated as “earnings”. (This is assuming the legislation currently before Parliament is passed in its current guise.) So for those with large super balances, the reserves will be taxed if the pension is wound up in 2025/26 and beyond but not if it’s done “now”.
There’s another less direct link between legacy pensions and Division 296 tax.
The techniques used to get rid of legacy pensions often involve causing the member to exceed their transfer balance cap. This is why it’s generally only possible for people with large super balances. Many people with more than $3m in super will look to reduce their balance in the lead up 2025/26 to minimise the impact of the Division 296 tax. Imagine their disappointment if they discover that winding back their super in this way (by, say, withdrawing a lot of money from their accumulation account now) means they no longer have enough to create the excess they need to unwind their legacy pension? Anyone with a legacy pension should definitely consider it carefully before taking large amounts out of super.
We’d love the Government to have reaffirmed their commitment to an amnesty or – even better – introduced legislation to actually do it. But since there was nothing at all in the 2024 Federal Budget, it seems members with these pensions are still on their own. For many people, 2024/25 will be the year to take action regardless.
We can provide advice to you or directly to your client on how to deal with their legacy pension. Contact us on 1300 433 376 to discuss.