Legacy Pension Changes 2025-2027

What They Could Mean for Your Retirement

Rules around legacy pensions are finally shifting and for many older Australians, these changes could reshape how you manage your superannuation and retirement income in the years ahead. Individuals holding certain legacy income streams have be given a two-year window (1 July 2025 to 30 June 2027) to exit or restructure their pension without the harsh tax consequences that previously applied.

If you started a defined benefit, market-linked, or flexible income stream before the mid-2000s, chances are you’re part of a group holding what’s now called a legacy pension. These older products were often generous, but inflexible and until recently, most people were unable to convert, commute, or restructure them without facing hefty tax consequences.

Now, with the Federal Government’s Legacy Pension Reform, the door has opened to new opportunities and new decisions for retirees.

What Are Legacy Pensions?

Legacy pensions are older superannuation income streams that were established before the rules changed on 1 January 2006. They include:

• Market-linked pensions (term allocated pensions)
• Complying lifetime or life-expectancy pensions
• Certain defined benefit income streams

These pensions were originally designed to provide stable, long-term income in retirement and, in some cases, offered significant tax advantages. However, they also came with rigid conditions limited commutation rights, no ability to restructure, and restrictions on switching providers or accessing lump sums. In short, once you started one of these products, you were locked in for life.

What’s Changed

The Federal Budget 2024–25 confirmed that individuals holding certain legacy income streams will be given a two-year window to exit or restructure their pension without the harsh tax consequences that previously applied.

The window will run for two years from 1 July 2025 to 30 June 2027.
During this period, eligible individuals will be able to:

• Convert their legacy pension back into an accumulation account, or
• Restructure it into a new income stream product under current super rules,
  without triggering unwanted tax outcomes such as:
  • Excess transfer balance tax,
  • Additional assessable income, or
  • Loss of grandfathered social security treatment.

• Come Under Modern Pension Rules:
  Once converted, retirees will fall under current superannuation caps, minimum drawdowns, and transfer balance limits (currently $1.9 million as of 2025).
• More Flexibility:
  The change allows retirees to align their investments with today’s market conditions, access lump sums, or consolidate accounts, options previously unavailable.

Who Can Benefit the Most?

This reform mainly benefits retirees who:

• Are stuck in inflexible legacy pensions with limited investment options or outdated income rules
• Want to consolidate multiple super accounts into one
• Need to access lump sums for aged care, medical costs, or estate planning
• Have pension balances below the transfer balance cap and want more modern drawdown flexibility
• Surviving spouses who have inherited these older income streams and want to simplify their affairs.

However, those already receiving Centrelink benefits or with defined benefit income streams linked to lifetime guarantees should seek careful advice as changing products could alter their means-tested pension entitlements.

What Are the Risks and Considerations?

While the reforms bring flexibility, they also require careful evaluation. Before making a move, consider the following:

• Loss of guaranteed income: Some legacy pensions provide lifetime payments that can’t be replicated by newer products.
• Centrelink impact: Switching to an account-based pension could change how your assets and income are assessed for the Age Pension.
• Tax implications for beneficiaries: Altering how your super is structured may affect how your estate is taxed when passed to dependants.
• Transfer balance cap restrictions: When converting to a modern pension, any amount over the $1.9 million cap may need to remain in accumulation phase, where earnings are taxed at 15%.

How We Can Help

At Cashflow Financial, we can help clients assess:

1. Eligibility and timing: Determining whether your pension qualifies for the two-year window and the best date to act.
2. Tax modelling: Calculating the impact of conversion on your tax-free components, assessable income, and super caps.
3. Centrelink outcomes: Forecasting how the change could affect government pension payments or thresholds.
4. Estate and succession planning: Ensuring the new structure aligns with your long-term legacy goals.

We can also coordinate with your financial adviser or super fund to ensure the transition is smooth and compliant.

Legacy pension reforms offer long-awaited freedom for many retirees, but they also introduce complex choices. For some, switching to a flexible, modern pension could unlock greater control and simplicity. For others, staying the course may preserve the security of a guaranteed income stream.

Before making any decision, it’s crucial to seek specialist accounting and superannuation advice. With the right guidance, you can make sure these changes work for your retirement not against it.

Need Advice?
Contact Cashflow Financial today for personalised advice on how the 2025 legacy pension changes could affect your retirement plan and superannuation structure.