Recent regulatory changes have created a significant planning opportunity for individuals holding legacy pensions within self-managed super funds (SMSFs).

In this article, Matthew Keller and Ankur Sharma explore how these older pension structures can now be commuted under a new reform. This reform has introduced a limited window that allows certain legacy pensions to be commuted, providing greater flexibility for affected members.

For SMSF trustees and retirees with these arrangements, now may be an ideal time to review whether their existing pension structure still aligns with their financial and retirement goals.

What is a legacy pension?

Legacy pensions are older superannuation income streams established under previous superannuation legislation. They were commonly used in SMSFs prior to the introduction of modern account-based pensions.

Examples of legacy pensions include:

• Lifetime defined benefit pensions
• Life expectancy pensions
• Market-linked (term allocated) pensions

These pension types were generally subject to rigid rules, including limited or no ability to commute the pension, meaning members often had little flexibility to restructure their retirement income strategy.

As superannuation legislation evolved, many individuals were left holding pension arrangements that no longer suited their broader retirement planning objectives.

What has changed?

Under new regulations, a five-year legacy pension commutation window has been introduced.

From 7 December 2024 to 6 December 2029, eligible legacy pensions may be fully commuted, allowing members to exit these older pension structures.

This opportunity applies to:

• Lifetime pensions (including those held in SMSFs and small APRA funds)
• Life expectancy pensions
• Market-linked pensions

The reform is designed to give members greater flexibility to restructure their retirement income arrangements in line with modern superannuation rules.

What happens if you commute a legacy pension?

If a legacy pension is commuted, several outcomes will occur within the superannuation system.

These may include:

• A transfer balance account debit being recorded
• The commuted amount being allocated back to your superannuation account

Once the funds return to your super account, you may choose to:

• Start a new account-based pension (subject to your available transfer balance cap)
• Withdraw a lump sum from super
• Leave the amount in accumulation phase
• Use a combination of these options

While the additional flexibility can be valuable, the tax implications, transfer balance cap position and retirement income strategy should be carefully assessed before making a decision.

What about reserves in legacy pensions?

Some legacy pensions include associated pension reserves within the SMSF.

The new regulations also modify how reserve allocations are treated for tax purposes when a legacy pension is commuted.

If reserves are not managed correctly, this may create unintended consequences such as:

• Contribution cap breaches
• Unexpected tax liabilities
• Complex reporting obligations

For this reason, careful planning and professional advice are particularly important where reserves are involved.

Why review your legacy pension now?

The five-year commutation window presents several potential strategic opportunities for SMSF members.

Depending on your circumstances, commuting a legacy pension may allow you to:

• Increase flexibility in accessing retirement capital
• Simplify complex pension structures
• Improve retirement income planning
• Enhance estate planning outcomes for beneficiaries

However, commuting a pension can also affect tax outcomes, transfer balance caps and social security entitlements, so it is important to consider the broader financial implications.

Summary

If you currently hold a lifetime pension, life expectancy pension or market-linked pension within an SMSF, this regulatory change may create an opportunity to restructure your retirement arrangements.

Before making any decision, it is important to carefully model the financial outcomes and understand how commuting the pension may affect your overall strategy.

Speaking with your financial advisor and accountant can help ensure you take advantage of the new flexibility while avoiding unintended tax or compliance consequences.

Speak with an SMSF specialist

Our accountants and SMSF advisors, based in Blackburn in Melbourne’s City of Whitehorse, can help you review your legacy pension arrangements and assess whether commuting your pension may be beneficial under the new rules.

We can work alongside your financial advisor to model the tax outcomes, transfer balance cap implications and retirement planning opportunities.

Call us on (03) 9875 2900 or get in touch online to discuss your situation. You can also follow LDB on LinkedIn for regular updates on tax, superannuation and financial planning.