Legacy pensions – another piece of the puzzle

It’s been nearly 4 months since super laws were changed to allow the commutation of legacy pensions. But there was unfinished business: an extra legislative instrument for social security recipients. It’s here at last. Sort of.

The latest addition to the legacy pension saga is Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025.

First a quick recap to explain where this legislative instrument fits in.

The Government changed the super regulations back in December 2024 to allow so called “legacy pensions” (complying lifetime pensions paid from SMSFs, complying life expectancy and market linked/term allocated pensions) to be fully commuted at will during a five year amnesty period (7 December 2024 – 6 December 2029).

For many people, that change was enough – and they have happily commuted their pension, and the proceeds have been left in accumulation phase, paid out of super, used to start a new account-based pension or some combination.

But some members had legacy pensions that entitled them to special exemptions under the “assets test” for (say) the age pension. Specifically, the Social Security Act 1991 allowed them to exclude 100% or 50% (depending on the type of pension and when it started) of their pension balance from the assets test.

Unfortunately, the social security rules weren’t changed at the same time as the super laws. That presented a problem for any member with one of these 100% or 50% “Asset Test Exempt” (ATE) pensions: taking advantage of the amnesty would mean breaking the social security rules. Breaking the social security rules is particularly bad – it doesn’t just mean losing the asset test exemption, it also has a retrospective impact. That’s because when the pension rules are broken, the Government looks back over the last 5 years and recalculates the member’s age pension entitlement as if the pension account hadn’t been 100% or 50% exempt during that time. Inevitably that means the member has been overpaid (in terms of their age pension) and they owe a debt to the Commonwealth. The Commonwealth is known to have a penchant for demanding people pay their debts.

What’s changed?

Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025 is a new legislative instrument that waives any debt if the member commutes their pension in line with the super laws. Since these include the 5 year amnesty, it means even 100% or 50% ATE pensions can be commuted.

(In fact, until this instrument, even changing a fund’s rules to allow the pension to be commuted was enough to trigger a debt – so the instrument waives debts for both commuting the pension and changing the rules to allow it.)

Note that anyone who commutes their ATE pension will lose their asset test exemption on that money going forward ... permanently. So some people may still choose not to use the amnesty or may choose to wait until closer to the end of the amnesty period in December 2029 to do so. Either way, they will not have a debt to pay under the 5 year “look back” process.

For example, Jess (single, homeowner, aged 80) has a market linked (term allocated) pension balance currently worth $600,000 which is 50% ATE. She has other assets valued at around $10,000.

At the moment, her “assets” for the age pension assets test amount to $310,000 (50% of her market linked pension balance plus her other assets of $10,000). Unless the income test applies (ignored here), she is entitled to the full age pension (currently $1,149 pf including supplements).

If she commutes her market linked pension, the full balance will count as an “asset” for the age pension assets test – so she will have $610,000 in assets. She will still be eligible for a small age pension (but much less (around $260 per fortnight including supplements)).

Note there’s not much Jess can do to avoid having her full market linked pension balance count for the age pension assets test if she commutes it. That’s because it will count whether the money is converted to a new account-based pension, left in an accumulation account or withdrawn from super and deposited or invested in her own name.

When does the debt waiver start?

Well actually that’s complicated – I would still hold off for now.

The changes to the super rules introducing the legacy pension amnesty commenced immediately from 7 December 2024. They could still be disallowed by the Parliament post election (the time period for a disallowance hasn’t finished yet) although that’s unlikely. If they are disallowed, technically the amnesty could be pulled altogether but even if it is, that wouldn’t make any commutations that had already occurred illegal – the regulations are law until they’re not.

It's slightly different for debt waivers under the social security rules. Technically it’s the Secretary of the Department of Social Services who decides to waive the debt rather than the Minister. The Secretary can only do so if:

• the Minister has registered an Instrument saying this type of debt can be waived (and that’s what has just been released), and
• the disallowance period for that instrument has passed.

Then, the Secretary can exercise their discretion to waive a debt. They can choose to go right back to 7 December 2024 if they want to – and they may well do that – but we don’t know yet.

So why are we:

• gung ho about commuting legacy pensions “now” (despite the fact that the regulations could still be disallowed) for anyone not receiving social security benefits, and yet
• still telling social security recipients to wait?

It’s because we need to know for sure when the Secretary will start waiving debts. The last thing we want is to press go too early and end up with a debt that won’t be waived.

Confused? So was I – thank you Craig Day for explaining how this works for the Social Security Act. (Note that any mistakes in interpreting his explanation are my own.)

If you missed our webinars on legacy pensions and reserves the recordings and technical papers are still available for purchase. If you’re winding up legacy pensions and would like help documenting the changes we can help with that too. Check out our dedicated web page here.