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Allan (26) was forced to hang up his boots at the end of last season after several concussions.
He missed the whole of the 2015 season because of a head knock he suffered in the opening game of that season and, after another two knocks last year, decided to give up playing after last season.
He took a job with the Otago union as a coaching development officer and is now included in the Otago Mitre 10 Cup coaching team for the coming season.
Allan joins the Otago set-up as the defence coach.
The team will play its first game of the competition on Thursday against North Harbour in Auckland.
Otago coach Cory Brown said he had no hesitation in taking on Allan as the side's defence coach.
``He is employed by the union and is going to be a damn good coach. I'm really confident of what Lee has to offer and he has a great way with the players,'' Brown said.
Despite only retiring last season and having played with many of the guys he is now coaching, Brown did not have any worries Allan would be too close to the players.
``He is a fine leader and is really enthusiastic for the game. He is going to offer a lot of value for the side.''
Allan, who attended South Otago High School, played 34 games for Otago as a loose forward after making his debut in 2012. He played two games for the Highlanders in 2014 and was a squad member of the title-winning Highlanders side in 2015 although he did not play a game.
Allan replaces Ben Herring as defence coach. Herring is now the defence coach for Japan and the Sunwolves.
Brown has a new assistant coach in former All Black lock Tom Donnelly, who is looking after the forwards.
Brown said former All Black prop Kees Meeuws would also be helping the props with some technical advice in the scrum.
Meeuws has previously worked with the Highlanders as a scrum coach but had concentrated on business interests in the last few seasons.
Brown said he was keen to get Meeuws involved in the scrummaging and Meeuws was eager to help out.
Keith Cameron has been the scrum coach for the side over the past two seasons but he would not be involved this year.
Otago has been training hard over the past few days and had a camp last week at Berwick.
It welcomed back all its Super Rugby players last week and all will be available for the opening match.
It has played just the one full pre-season game against Southland in Gore on August 4.
The side will be captained by hooker Sam Anderson-Heather after last year's captain, Liam Coltman, was forced out for the season because of an ankle injury.