Trapped legacy pension holders finally offered a legislated escape route

If you’re locked into a term-allocated pension, lifetime pension or life-expectancy pensions there is finally an escape plan.

It sounded like a good idea at the time – convert your super to a retirement income stream and receive both a leg-up on your Centrelink entitlement and a potential monthly pension payment for life.

These products, which were popular in the late 1990s and early 2000s, disappeared from the public eye in 2007 after legislative changes took effect.

However, the SMSF association estimates that there are at least 17,000 of these accounts still active today inside SMSFs, and potentially many more in retail super accounts – and unhappy account holders want out.

Known as “legacy retirement products”, the three main types are term-allocated pensions, lifetime pensions and life-expectancy pensions. They had been offered by companies such as AMP, MLC and Challenger.

A term-allocated pension is very similar to an account-based pension you can get today, but the main difference is that with a term-allocated pension, once it starts it cannot stop. Although you lose access to the capital, you benefit from a 50 per cent exemption of Centrelink assets test. Using this product was useful for people hovering around the assets test threshold and allowed them to boost their Centrelink benefit.

The other two products – lifetime pensions and life-expectancy pensions – were more annuity-based. Unlike the term-allocated pension where you still had to pick investments and your account balance changed depending on market returns, the lifetime pension promised to pay a set income stream every month until you die, whereas the life-expectancy pension would pay a set amount each month generally until your mid to late 80s and then stopped. Both were 100 per cent exempt from the Centrelink assets test and concessionally treated under the Centrelink income test.

Fast forward 25 years and the problem for many is that circumstances have changed and the rationale for these accounts may no longer be valid – and many want out.

A retiree who took out a term-allocated pension 25 years ago might have enjoyed a boost in the age pension back then, but with Centrelink’s asset test thresholds increasing each year as well as a natural decline in their retirement savings over time, the retiree may be entitled to a full age pension regardless of the assets test concession on their legacy income stream which has them trapped.

Another issue with legacy retirement products is that some were purchased using self-managed super funds. As a result, some retirees are paying thousands of dollars per year in SMSF fees to maintain an income stream that might only be worth tens of thousands, rather than hundreds of thousands of dollars when they first took it out.

Given that many of the account holders are now well into their 80s and access to capital to pay aged-care bonds is far more attractive than the assets test concessions on their legacy income stream, many have been unhappy with these products for years.

But in an early Christmas present the government has passed legislation to provide retirees – who took out these Centrelink-advantaged retirement income streams before September 20, 2007 – a way out. There is now a five-year window of opportunity to cancel these pensions and transfer the money out of super. The legislation also allows for any money kept in reserve by the product providers to be paid out.

In practice there are several challenges that still need to be worked through, such as calculating the exit value of these legacy pensions, the tax treatment of withdrawals and, if the money is kept in super, the Centrelink treatment and how they will be treated under current super rules such as the transfer balance cap and total super balance.

The SMSF Association has been lobbying the government for years to change these legacy pensions. “These newly registered regulations … provide much-needed reform to retirees trapped in non-commutable legacy pensions, including legacy lifetime, life expectancy and market-linked income stream products.” CEO Peter Burgess says.

“Considering the age of these superannuants, they now have a genuine opportunity to restructure their retirement savings effectively.”

But there are issues of fairness. For most retirees who opted for traditional retirement income streams and received no Centrelink concessions, is it fair that a retirees who agreed to restrictive terms on their super in order to access substantial Centrelink benefits now have the opportunity to unwind these arrange­ments when it no longer suits them?

To a large degree, the answer does not matter. The legislation has passed both the lower and upper houses of parliament and received royal assent on December 5.

So if you commenced a Centrelink-advantaged income stream but no longer want it, you will be able to have your cake and eat it too.

You now have five years to contact your product provider and work through the withdrawal ­process.

James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au