If you’ve been tracking the evolving world of legacy retirement products and their interaction with social security assessments, a key piece of the puzzle has just landed—the Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025. Released on 28 March 2025, this legislative instrument seeks to resolve an otherwise awkward policy conflict that could have left many retirees facing unexpected social security debts. But let’s step back for a moment and understand what it means and why it matters.
In typical fashion, when legislation meets policy design, complexity is never too far behind. But when that complexity directly impacts retirees and their access to age pension entitlements, clarity becomes crucial.
Let’s dive into what’s going on here.
Why Commute?
Legacy superannuation income streams—such as lifetime pensions, life expectancy pensions, and market-linked income streams—have long presented a headache for members and advisers alike. Often set up decades ago, many of these products are inflexible, overly restrictive, and in some cases, no longer fit the financial or lifestyle needs of the retiree.
Recognising this, Treasury introduced the Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024, which commenced on 7 December 2024. The amendment opened the door for members of certain legacy products to commute their income streams and where possible convert them into modern, more flexible retirement income solutions.
But here’s the catch, the very features that made these legacy products eligible for favourable treatment under the social security system—namely, their non-commutability—were undone by these reforms. In other words, commutation, while great from a superannuation flexibility standpoint, could lead to a reversal of the asset-test exemption that underpinned many retirees’ social security entitlements.
That’s where the new 2025 Specification comes in.
The Social Security Issue: Debts Arising from Commutation
Under section 1223A of the Social Security Act 1991, if a recipient commutes an asset-test exempt income stream in a way that conflicts with the original rules of the product, they may incur a social security debt.
Here’s how it works:
- Legacy income streams were granted asset-test exemption if they met specific conditions (i.e., being non-commutable, providing lifetime income, etc.).
- If these products are commuted, even lawfully under the new Treasury Regulations, they technically breach their original terms.
- This breach triggers section 1223A, causing Centrelink to retrospectively reassess the income stream as not asset-test exempt for a period up to 5 years.
- The result? The pensioner may owe a debt equivalent to the difference in pension payments received under the exempt vs. non-exempt treatment.
The kicker here is that this outcome runs contrary to the intention behind the Treasury reforms—to allow retirees to reshape outdated products without penalty.
The Debt Waiver
To reconcile this disconnect, the Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025 has been introduced under subsection 1237AB(1) of the Social Security Act. This provision allows the Secretary of the Department of Social Services (or their delegate) to waive certain classes of debts arising under the Act.
It should be noted that it’s not just income streams that are commuted that may be liable for a debt.
Two key classes of debts are now covered:
1. Debts Arising from Commutation – Section 1223A
These debts arise when a retiree fully commutes a legacy income stream, triggering section 1223A.
For an SMSF to be eligible for waiver:
- The commutation must comply with the new regulations:
- SIS Regulation 1.06C
- SIS Regulation 1.06C
- The debt must not result from false or misleading information.
- The product must have originally satisfied section 9A, 9B, or 9BA (asset-test exempt status requirements).
2. Debts Arising from Non-Commutation – Section 1223
Here’s the curveball.
Even if a retiree doesn’t commute their legacy product, changing the rules of the product to allow for commutation can still trigger a loss of asset-test exemption and as such result in a debt. Why? Because asset-test exemption is conditional on the income stream continuing to meet the criteria, including being non-commutable.
So if the governing rules are updated to enable commutation (even if the person doesn’t act on it), the product may cease to meet the exemption conditions—thereby triggering a debt under section 1223. It’s important to note that the Social Security Act 1991 definition of governing rules includes any legislation governing the operation of the income stream. So whilst the Specification does state a debt would only likely be raised if the contract or governing rules of the income stream were changed to enable the income stream to be commuted in accordance with the new SIS Regulations, there is a risk some clients may fall foul of the law with a poorly worded governing rules.
To be eligible for waiver here:
- The only reason the exemption status failed must be the rule change for commutation.
- The product must have originally met the exemption requirements.
- Again, no false or misleading information must have been provided.
This is a crucial safety net for individuals who do nothing wrong but are affected by technical outcomes of regulatory change. The intention has always been to allow individuals to retain their asset-test exemption if they so choose to.
The Broader Implication: Policy Aligned with Purpose
The 2025 Specification is a prime example of legislative housekeeping—aligning technical social security law with the intent of superannuation reforms. It ensures that the Treasury’s goal of freeing retirees from legacy traps isn’t undermined by unintended social security consequences.
It also serves a broader reminder: any change to superannuation products—especially legacy ones—must be viewed through both a tax and social security lens.
For advisers working with clients considering legacy commutations, this Specification provides much-needed assurance that adverse Centrelink consequences can be mitigated, provided the commutation or product change follows the specified rules.
Timing and Administration
The Specification commences after the disallowance period set under the Legislation Act 2003. From that point, the Secretary (via Services Australia) has the authority to waive relevant debts, both retrospectively and going forward.
Importantly:
- The waiver is not automatic. It’s subject to a decision by the Secretary or delegate.
- The decision is reviewable under the Social Security (Administration) Act 1999—giving affected recipients access to internal and external review mechanisms.
- The Specification does not impose compliance obligations or create new offences—its purpose is entirely beneficial.
Key takeaways
If you’re advising clients with legacy retirement pensions—the message is clear:
You should be now reviewing your clients’ legacy pensions in light of the finalised regulations.
Assess whether commutation makes sense—both from a superannuation and social security standpoint.
Ensure any commutation is executed strictly in accordance with the SIS Regulations and fund’s governing rules.
Be proactive in engaging with Centrelink and Services Australia on debt waivers where appropriate.
Educate your SMSF clients about the implications of changing the governing rules—even if they don’t intend to commute.
The regulatory environment is finally giving retirees an exit ramp from rigid legacy products. But as always, the key lies in execution.
Final Thoughts
The Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025 is a pragmatic move to align social security outcomes with superannuation reforms. It reflects an understanding that retirees shouldn’t be penalised for following Treasury-sanctioned pathways out of legacy products.
As the industry continues to work through the legacy product conversion window (which runs until 6 December 2029), this Specification adds a vital layer of certainty.
But for advisers, the message remains clear: due diligence, documentation, and compliance remain non-negotiable.
As always, at Smarter SMSF, we’ll be keeping a close watch on the implementation of this measure and how it interacts with the broader retirement income framework. You can access our legacy pensions hub for details on these new regulations, along with access to order forms, calculators and much more.
