The Financial Advice Association has suggested the Government consider giving investors more time to exit legacy retirement products, noting the likely need for financial advice but a limited number of advisers capable of providing it.  

The government launched consultation for the ‘Treasury Laws Amendment Instrument 2024: Self-managed superannuation funds – legacy retirement product conversions and reserves’ in September. 

The amendment was introduced to relax commutation restrictions on legacy lifetime, life expectancy and market-linked superannuation income stream products that commenced prior to 20 September 2007. 

The new law will allow individuals to exit products that are no longer suitable for their circumstances, remove barriers that currently prevent the closure of obsolete funds and legacy products, and allow for the allocation of reserves that no longer serve an ongoing purpose.  

The updated rules would enable individuals to leave these legacy products with the resulting capital used to commence an account-based income stream, left in an accumulation interest account, or withdrawn from superannuation entirely. However, this must happen within a five-year grace period which begins from when the new regulations will commence. 

The changes effect members of SMSFs and small APRA-funds, rather than larger APRA-regulated entities. 

In its submission, the FAAA was supportive of the five-year timeframe due to how long exiting a legacy income stream product, as well as closing an SMSF can take.  

But the FAAA has argued that in many cases exiting a legacy product requires professional financial advice, which presents a potential supply issue. 

“Access to financial advisers with the expertise relevant to these legacy products…might be challenging, necessitating a reasonable period of time,” the submission said. 

“We encourage the Government to be open to consideration of an extension should complications arise that reduce or delay the uptake of this important measure.” 

Given the complexity of exiting these products and the anticipated difficulty of getting financial advice, the association also suggested “other forms” of communications with SMSFs and the provision of guidance by the ATO to financial advisers, accountants and trustees is “critical”. 

But overall, the FAAA supported the provisions in the draft legislation because they removed unnecessary complexity and helped to close SMSFs that are no longer fit for purpose. 

“There are many Australians who either have unnecessary complexity in their superannuation arrangements or are forced to keep an SMSF open even when this is no longer appropriate or where they no longer have the capacity to operate an SMSF,” the FAAA submission said. 

“This is an important measure to address rules that are currently forcing people to remain in products that are no longer appropriate for their needs, including where their balance is too low to justify the ongoing costs of running an SMSF or where they no longer have the capacity to operate them.” 

The FAAA also noted these legacy products had “material” Centrelink asset test benefits but that the benefit would have diminished over time as the value or commutable balance of those products declined since they were commenced. 

“It is appreciated that this asset test treatment benefit will be lost as a result of exiting from these products,” the submission said.  

“It is important that there are no other penalties, including any lookback or claw-back mechanism, that may be applied to reassess Government pension benefits paid in prior years. It is our understanding that the commutation of these income streams would result in them being treated as an asset tested income stream from the date of commencement, with excess payments recouped for up to five years.” 

Instead, the association asked to have legislative mechanisms introduced to ensure this doesn’t occur. 

“In the absence of resolving this issue, there would be little incentive for these members to take advantage of this reform, undermining the good policy intent as proposed,” the submission said. 

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