Legacy pension amnesty and reserve changes – here at last

I did wonder if I’d ever write those words, more than a few times in the last few years, but it seems we can. So what happens next?

At long last, the Government has registered the regulations covering two important topics:

• Temporary rules (lasting 5 years from 7 December 2024) allowing so called legacy pensions to be commuted without strings (we’ve previously covered this here). Legacy pensions include some you may never have heard of: complying lifetime, complying life expectancy and market linked / term allocated pensions, and
• New rules that make it easier to deal with fund reserves (which we also covered here).

The regulations registered in the last few days are very similar to the ones originally released so our comments about some people being missed remain.

The new reserve rules last indefinitely – not just 5 years. And they essentially provide two things:

• A much longer list of reserve allocations that won’t count for any contribution caps at all, and
• Even for those where a reserve allocation will count, the rules now check the allocation against the recipient’s non-concessional contributions cap, not their concessional contributions cap.

So what does that mean right now?

Firstly – if your client’s legacy pension was put in place for social security purposes, hold fire. We are still waiting for an additional legislative instrument that will make sure they receive the appropriate treatment under the Social Security Act 1991. (While they will lose their asset test exemption moving forward, we need this instrument to ensure they are not also issued a debt notice assuming that the pension counted for the assets test for the last 5 years.)

Secondly – if your client has already started unwinding an old legacy pension and is in the middle of implementing the slightly more complex set of steps previously required to do that, get in touch with your advice provider. While the new rules won’t make a lot of difference to the final outcome, you may be able to get there more quickly and save some tax in the interim.

Thirdly – if you haven’t done anything yet, get in touch with us in the New Year. We can advise you on how to unwind your legacy pension or reserves or both. Because don’t be fooled - the new rules are simple but there is still complexity in how some of the existing rules impact any wind up. For example:

• Nothing has changed when it comes to the calculation of the commutation value of existing legacy pensions for transfer balance cap purposes. It’s not just the account balance. For many people it won’t be possible to just move the entire balance of their current legacy pension to a new account-based pension – there will be a transfer balance cap limitation,
• The fact that legacy pensions can now be moved directly to account-based or accumulation accounts presents some new options in terms of optimising the tax components for beneficiaries – don’t miss out on those,
• For some people, there might still be good reasons (in particular, ECPI) for continuing the legacy pensions if only for a time. Don’t act too quickly,
• As we’ve mentioned before, some reserve allocations aren’t covered by the new rules and so will count towards the non-concessional contributions cap. This is particularly relevant where you have an “old” reserve and the member(s) who once received a pension from this account have died – don’t misunderstand the rules here,
• On the flipside, even those who have reserves but have never had a legacy pension (or not for many years) have some new options – don’t miss out,
• Anyone whose reserve allocations will count towards the non-concessional contributions cap has additional choices to make (and opportunities for better or worse results). Don’t assume the right result will always be allocating everything immediately, and
• If you’ve already made some reserve allocations in 2024/25 under the “old” rules, both the old and new rules actually operate this year depending on when you made the allocation. Don’t assume everything allocated in 2024/25 is covered by the new rules.

As always, this is an area of the law in which we are fortunate to have several industry leading experts in-house – don’t hesitate to contact us if we can assist. If you’re an adviser, we can provide you with options to help you advise your clients. If you’re an accountant who wants to help a client make these changes but can’t provide advice, or a trustee with one of these pensions, we can help with a Statement of Advice. Or whoever you are, we can simply explain the rules as part of our “phone a friend” technical support service.

We expect that for many of you, the last few weeks before a Christmas break is not the ideal time to engage with a complex change for some of your larger clients! So don’t panic – we’ve been advising on these pensions for 26 years and we’ll be around to provide more guidance, education and advice in the New Year.

We'll be running a webinar in the new year covering the changes to legacy pensions - you can register your interest here.

And if you need support in the meantime, our Technical Support Desk are available to answer your questions here.