Important Changes to Legacy Pensions: What You Need to Know

James Creevy and Mitchell Harding, current as of: 15 May 2025.

In December 2024, the Australian Government introduced important changes that could affect thousands of members of SMSFs that are receiving superannuation income streams known as legacy pensions. These changes provide more flexibility in managing retirement funds and are aimed to improve how a member accesses and uses their super. However, before making the decision to commute one of these legacy pensions, there are some important things to consider—especially when it comes to Centrelink payments and an individual members transfer balance cap.

What Are Legacy Pensions?

Legacy pensions are income streams that were established some years ago now, with the majority commencing before 2007. Legacy pensions affected by these changes include:

• Market-linked pensions;
• Complying lifetime pensions; and
• Complying life expectancy pensions.

These legacy retirement products were popular at a time when they offered tax benefits or helped retirees qualify for Centrelink payments. However, these pensions came with one distinct feature which was that they couldn’t be commuted or exited once commenced by a member—however, that has now changed.

The Big Update: You Can Now Commute Legacy Pensions

As of December 2024, a five-year window was introduced that allows members with these legacy pensions to fully commute them and:

• convert the amount commuted into an account based pension; or
• choose to roll the commuted amount back into accumulation phase; or
• withdraw the funds from their SMSF and the superannuation system altogether;

The changes to allow a member of an SMSF to exit these stringent legacy pensions affords a greater level of flexibility to members in managing their income in retirement, but there are a few things to keep in mind when making the decision to commute these types of income streams. 

Importantly, Rule 5.11 in each Acis SMSF Deed outlines that ‘a pension must be subject to the terms and conditions contained in the Act and Regulations in relation to that type of Pension.’ One of those conditions now is that Regulation 1.06C apply to Reg. 1.06(2) [lifetime], Reg. 1.06(7) [life expectancy] and Reg. 1.06(8) [market-linked] pensions. Regulation 1.06C is the Regulation which allows for commutations of legacy pensions but, the considerations outlined in the rest of this article will highlight why it is essential professional advice be sought before making any decision whether or not to commute.

What Does This Mean for a Members Transfer Balance Cap? 

One of the most important things to think about is how this affects an SMSF members Transfer Balance Account (TBA) and Transfer Balance Cap (TBC). The TBA tracks how much of a Members super has been moved into retirement phase while the TBC is the limit on how much of a member’s superannuation balance can be in retirement phase where any earnings are generally tax-free. Each member will have their own TBC and, depending on when a member commenced their first retirement phase income stream, a members TBC will be between $1.6 million and the 2024–25 general cap of $1.9 million.

If a member chooses to commute their legacy pension and start a new income stream, it needs to be kept in mind that any new income stream will affect a Members TBA and TBC differently to a legacy pension. Therefore, prior to commuting an existing legacy pension and commencing a new pension, advice from an actuary is essential because if a Members TBC is breached due to the commencement of a new pension, it will result in an excess transfer balance determination being issued by the ATO. Should this happen, not only will the excess need to be commuted back to accumulation phase or withdrawn from super, excess transfer balance tax will also be payable.

What About Centrelink?

While these changes give members who had legacy pensions access to capital that was previously inaccessible and that capital can now be used to fund their retirement in a more flexible manner, the commutation of such a pension will also have an effect on an individuals Centrelink entitlements. When first introduced, it was a popular strategy to commence a legacy pension to get better outcomes under Centrelink’s means tests. Some of these pensions were either partially or fully exempt from the assets test, which meant people could receive the Age Pension in addition to a legacy pension.

If you decide to stop your legacy pension and replace it with a newer one, like an account-based pension, that exemption is lost and the balance of that pension is treated as an assessable asset under the test determining the eligibility for the Age Pension. 

So, while commuting a legacy pension gives a member more control over the money funding their retirement, it might also have an effect on any government support payments they have been receiving to date. It’s a balancing act and needs to be carefully considered.

What About Fund Reserves?

An update to the rules about how reserves (extra money in the fund not assigned to anyone) are treated when a legacy pension is stopped has also been included with these changes.

Now, these reserves can be allocated to members without counting towards their non-concessional contributions, as long as they’re eligible to receive them. This could be a smart way to boost your super—again, with the right advice.

What About The Current Pension Documentation?

Given the pension Regulations are permissive, not mandatory, importantly, they do not override the terms of an existing pension. 

If the existing pension terms and conditions restrict commutations, then a modification to the standard commutation documents should be prepared to include a generic request by the member to the trustee to commute and to modify the existing pension terms. This will then remove any restrictions on commutations that were previously in place.

The trustees would then need to consider the request, including the request to remove restrictions on commutation, then write back to the member approving the modification, as well as the commutation itself.

Should You Commute Your Legacy Pension?

There’s no one-size-fits-all answer. Commuting a legacy pension might be a good idea if a member:

• has a small legacy pension balance and the costs to maintain the pension have become comparatively excess;
• would like more flexibility and better investment choices;
• does not rely on Centrelink support payments;

But for others, especially those who rely on Centrelink entitlements or who are close to their transfer balance cap, it might not be worth it.

You have until December 2029 to decide, so there’s time to carefully weigh your options.

Key Takeaways

• You can now commute most legacy pensions (but it must be a full commutation) and move your money into modern, more flexible income streams.
• This could help with managing income, simplifying super, and estate planning—but may affect Centrelink benefits.
• The impact on a member’s transfer balance cap needs to be carefully considered to ensure any tax implications are known.
• Rule 5.11 in each Acis SMSF Deed permits any such commutation discussed in this article as it outlines that ‘a pension must be subject to the terms and conditions contained in the Act and Regulations in relation to that type of Pension.’ One of those conditions now is that Regulation 1.06C applies to Reg. 1.06(2) [lifetime], Reg. 1.06(7) [life expectancy] and Reg. 1.06(8) [market-linked] pensions. This is the Regulation which allows for commutations of legacy pensions but it is essential professional advice be sought before making any decision.

If your clients are using an Acis SMSF Trust Deed and may be affected by these changes, now is the time to speak with them to discuss their options. With the right strategy, you can make the most of this once-in-a-generation opportunity to potentially improve your clients retirement plan. Get in touch with our team today.

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