The legacy pension exit window is open — but the Age Pension impact cuts both ways

Since 7 December 2024, holders of certain legacy complying income streams — primarily term allocated pensions and market-linked pensions that commenced before 20 September 2007 — have been able to fully exit those products during a five-year government window (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/relaxed-commutation-rules-for-legacy-retirement-products). For many people stuck in inflexible products from the pre-2007 era, this is the first real opportunity to move on. But before acting, there is a question that needs an answer: the Age Pension impact of commuting one of these products is not the same for everyone. For some it helps. For others it hurts. Which outcome applies depends entirely on which test is currently limiting the pension.

One important point to establish before anything else: government defined benefit fund pensions — the CSS, PSS, DFRDB, and Military Super — are not eligible for this window. The commutation option applies to term allocated pensions and non-commutable life-expectancy or lifetime income stream products that commenced prior to 20 September 2007, or were commenced as a result of a conversion of an earlier legacy product that commenced before that date (ATO, https://www.ato.gov.au/about-ato/new-legislation/in-detail/superannuation/legacy-retirement-product-conversions-and-reserves).

Complying income streams like term allocated pensions — the products eligible for this window — have long received favourable assets test treatment under social security law. For products that commenced in the September 2004 to September 2007 window, the assessed asset value starts at 50% of the purchase price and declines over the product term as payments are made. For a client who has held a TAP for 15 or more years, the assessed asset value may be significantly lower than the actual account balance. This is a real and meaningful advantage under the assets test (DSS Guide 4.9.3.10, https://guides.dss.gov.au/social-security-guide/4/9/3/10). Commuting the product eliminates this favourable treatment permanently. Whatever the proceeds become — an account-based pension, accumulation phase super, or a lump sum withdrawal — they are assessed at full value from that point on.

Whether this matters — and in which direction — depends on which test is currently limiting the client's Age Pension. Centrelink calculates entitlement under both the assets test and the income test, then pays whichever produces the lower pension. The test that produces the lower amount is the binding one. For a client who is assets-test limited, the 50% assets treatment for the TAP is doing real work. Commuting removes it, assessed assets increase, and the pension may fall or be eliminated. Commuting is likely harmful from an Age Pension perspective in this case. For a client who is income-test limited, the picture can be the opposite. TAP payments are assessed as income at a level that may be above the deeming return a replaced account-based pension would produce. After commutation, the proceeds in an account-based pension are subject to deeming — the legislated notional rates applied to the balance regardless of actual withdrawals — which may be lower than the income that the TAP was generating under the income test. In that case, assessed income falls and the pension may improve.

The table sounds simple. The difficulty is that many people do not know which test is limiting them, or have not had their position reviewed since their financial circumstances changed. An adviser with access to Centrelink records can model both scenarios and identify what commuting would actually do to the pension entitlement. This is not a decision to make by intuition or by rule of thumb.

Under the commutation window, only full commutation of the product is available — partial commutations are not permitted. The commutation must be complete, and all minimum annual pension payments must have been made in the same financial year. The proceeds can be directed to one or a combination of: an account-based pension (subject to the Transfer Balance Cap), accumulation phase super, or a lump sum withdrawal.

Beyond the Age Pension analysis, there may be other factors worth considering. For clients receiving large income stream payments from a legacy product, there may be tax efficiencies from commuting and switching to a more flexible structure. Estate planning considerations also differ: withdrawing as a lump sum while living can in some circumstances be more tax-efficient than leaving the balance to flow as a death benefit through a super fund. Neither of these considerations overrides the Age Pension analysis — they are additional factors to weigh alongside it, not substitutes for the pension impact calculation.

The window closes on 6 December 2029. There is no benefit in waiting if the analysis is already clear. There is also no benefit in rushing before that analysis has been done. The worst outcome would be commuting in haste, discovering it was the wrong call for the pension position, and being unable to reverse the decision.

Sources

• Australian Taxation Office (ATO) — Relaxed commutation rules for legacy retirement products
• Australian Taxation Office (ATO) — Legacy retirement product conversions and reserves
• DSS Social Security Guide