Term Allocated Pensions and legacy income streams: the commutation window is open, and it closes in 2029

If you hold a Term Allocated Pension — also called a market-linked pension — or another legacy complying income stream commenced before 1 July 2017, you now have a choice you didn't have before. A five-year commutation window opened on 7 December 2024 and runs until approximately 7 December 2029 (FirstTech/Colonial First State, Capped Defined Benefit Income Streams Guide 2025-26, current to 30 October 2025). For the first time in many years, eligible holders can convert their legacy pension back to a lump sum and decide what to do with it. The decision to commute or stay put is not straightforward — the grandfathered Centrelink treatment that made these products attractive has real value for some holders and modest value for others — but the window is finite, and the question is worth examining before it closes.

A Term Allocated Pension (TAP) is a defined-term super income stream introduced in 2004. Payments are calculated using a formula — broadly, the account balance divided by the remaining term, within a tolerance band — and the product was structured to be non-commutable: holders generally could not convert it back to a lump sum and choose a different structure. In exchange for these restrictions, TAPs received favourable Centrelink assets test treatment. For TAPs and other complying income streams that qualified — specifically those commenced before 20 September 2007 — a 50 per cent assets test exemption applied, halving the assets-test impact of the pension balance and producing a meaningful Age Pension uplift for holders whose assets would otherwise have put them into the taper or cut them off entirely (FirstTech/Colonial First State, Capped Defined Benefit Income Streams Guide 2025-26). That 50 per cent exemption remains in place for holders who continue to hold their legacy stream — it is only lost if and when a holder commutes.

The legacy commutation window covers Term Allocated Pensions, non-commutable life-expectancy income streams, and non-commutable lifetime income streams generally commenced before 20 September 2007 (FirstTech/Colonial First State, Capped Defined Benefit Income Streams Guide 2025-26). One important carve-out: government defined benefit fund lifetime pensions — including CSS, PSS, DFRDB, and MilitarySuper pensions — are not eligible for the commutation window. Holders of those pensions cannot commute under this framework regardless of commencement date. For those it applies to, the window permits full commutation only; partial commutations are not permitted.

After commuting, a holder has three paths: start a new account-based pension (subject to the Transfer Balance Cap — the lifetime limit on retirement-phase super), return the commuted amount to accumulation phase, or withdraw as a lump sum. Each path has its own tax and Centrelink implications, and the best choice depends on the holder's individual position.

The Centrelink arithmetic on commutation pulls in two directions and is worth modelling explicitly rather than assuming. On the assets test side, commuting loses the 50 per cent exemption: an asset previously assessed at half its value starts being assessed at full value, which increases assessable assets and may reduce or eliminate the Age Pension for assets-tested clients. This is often the argument for staying put. On the income test side, however, the picture can go the other way: complying income streams are assessed at their full payment amount under the income test, whereas financial assets held outside a complying stream are assessed under deeming — and the deeming rate applied to those proceeds may produce a lower income figure than the actual pension payment. For income-tested pensioners, commuting and switching to a financial asset structure can actually improve their position (FirstTech/Colonial First State, Capped Defined Benefit Income Streams Guide 2025-26). Which test applies — assets or income — determines which effect dominates, and that depends on the individual's overall asset and income profile. Importantly, the government has confirmed that no social security debt is raised by commuting under this framework.

Tax treatment on commutation of legacy income streams uses the proportioning rule: the existing tax-free / taxable component proportions are preserved on the commutation. Where there is a meaningful "undeducted purchase price" (after-tax contribution component) carried over from pre-2007 contributions, this generally maps to the tax-free component of the resulting commuted lump sum (ATO general guidance on legacy stream commutation; specific cases require confirmation with the fund administrator and the ATO before action).

For TAP holders, the practical exercise involves a few concrete steps. First, identify whether the grandfathered Centrelink treatment is actually producing a meaningful pension uplift in your current position — the answer varies widely depending on your total assets and which means test is binding. Second, consider what you would do with the commuted balance: if the answer is an account-based pension, note that the Transfer Balance Cap applies and there may be TBC arithmetic to work through before commuting. Third, consider estate planning: a TAP under the complying stream framework has restricted death benefit options, whereas a commuted balance can be directed more flexibly — through a new income stream, accumulation, or withdrawal — and may be received tax-free by the estate in some circumstances. Fourth, note the rollover warning: if a TAP is rolled to a new TAP after 1 July 2017, the new TAP is not a Capped Defined Benefit Income Stream and will not receive the modified excess transfer balance treatment or the 50 per cent social security exemption (FirstTech/Colonial First State, Capped Defined Benefit Income Streams Guide 2025-26). A rollover is not a neutral event.

The commutation window runs until approximately 7 December 2029. For holders who have been in the same legacy structure for fifteen or twenty years, the window represents the first genuine opportunity to reconsider the arrangement with a full view of alternatives. Whether the right answer is to stay, commute and restructure, or commute and withdraw depends on individual circumstances that require proper modelling. The question worth asking now is simply: have you looked at this recently, and do you know what the grandfathered treatment is actually worth in dollar terms today?

Sources

• ATO — Relaxed commutation rules for legacy retirement products
• ATO — Transfer balance cap: capped defined benefit income streams
• DSS Social Security Guide 4.9.2.15 — Asset-test exempt income streams purchased 20/09/2004 to before 20/09/2007
• DSS Social Security Guide 4.9.2.30 — Income test assessment of asset-test exempt income streams
• Services Australia — Income streams and the Age Pension
• ATO — Calculating components of a super benefit (proportioning rule)