Govt warned against legacy product claw-backs

The Federal Government has been warned against seeking to impose look-back arrangements or claw-back mechanisms with respect to people closing down legacy retirement products.

As well, the Government has been reminded that the ability of people to obtain financial advice around the legacy products is likely to be difficult meaning that there may need to be flexibility around time-frames.

The Financial Advice Association of Australia (FAAA) has told a Treasury consultation that while it supports the regulatory measures around legacy pension products, it has concerns about some of the operational elements.

As well, the FAAA has echoed the concerns of other organisations about the Government applying an asset test to the process, arguing such a measure will act as a disincentive to the closure of legacy products.

“We are very much aware that there were material Centrelink asset test benefits in acquiring these products prior to 20 September 2007 in the form of lifetime, life expectancy or market linked super income stream products,” the FAAA said before pointing out the realities of changed circumstances.

“In many cases, the residual value or commutable balance will have fallen significantly since these products were initially commenced. Thus, the asset test benefit will have declined as well.

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

“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. We ask that legislative mechanisms are introduced to ensure that this does not 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.”

Elsewhere in its response, the FAAA made clear that while it supported the five-year timeframe being proposed for the legacy products regime, this might not be viable because of a shortage of financial advisers.

“We are supportive of the five year timeframe offered in this package. In the case of commuting an existing legacy income stream product, allocating reserves and closing an SMSF, this can take considerable time,” the FAAA said.

“It is also in many cases going to require access to financial advice and other professional services. Access to financial advisers with the expertise relevant to these legacy products (pre 20 September 2007), might be challenging, necessitating a reasonable period of time. 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.”