Child pensions which commence before 1 July 2017

In this situation the child will be treated as having a cap increment equal to $1.6m (which is the general transfer balance cap at 1 July 2017) in respect of each deceased member.

If the pension account balance is less than or equal to $1.6m, the pension will not be treated as being excessive in the hands of the child beneficiary.  It is irrelevant if the pension account balance increases after 1 July 2017.

If the pension account balance, as at 1 July 2017, is greater than $1.6m, then a portion of the pension will be excessive and the excessive portion will have to be commuted and paid as a superannuation lump sum to the child beneficiary.

If two or more pensions were payable in respect of the same deceased member (whether from the same superannuation fund or from different superannuation funds) – the account balance of the pensions would be aggregated and the aggregated balance applied against the $1.6m cap.  

It seems that if the child pension is a reversionary pension – then the “recognition” of the excess portion of the pension only occurs 12 months after the date on which the pension transferred to the child or 1 July 2017 (whichever is the latter).  This delayed recognition of the excess portion is due to the general rule that reversionary pensions are only recognised for transfer cap purposes 12 months after they transfer.

Also, it seems that, contrary to the normal rule as to sharing of the cap increment, if two more individuals each have child pensions which commenced before 1 July 2017 in respect of the same deceased member, each pension will have a cap increment of $1.6m.  This exception to the normal sharing rule is presumably justified as a transitional measure for pensions which were in place before the 2016 Budget superannuation changes.

Example 8

John died 31 December 2015 and his entire super benefit of $4m was paid as a pension to his two children Jeff (as to $2m) and Margaret (also as to $2m).  Jeff and Margaret were both under age 18 when John died.  The pensions, which both commenced to be paid on 1 January 2016, are child pensions.  

As each pension commenced to be paid before 1 July 2017, both Jeff and Margaret have a cap increment of $1.6m each.  Even though both pensions are from the same source, the cap increment is not shared between them (due to the special transitional rule).  As at 1 July 2017, the pension balance of each pension is $2.1m (due to investment earnings).

As from 1 July 2017, each pension will have to be commenced so that the pension balance is $1.6m at 1 July 2017.  It will be necessary to commute each pension by approximately 24% ($500,000) so that the pension balance (post commutation) does not exceed $1.6m.  The $500,000 must be paid to Jeff and Margaret as a superannuation lump sum.  The $500,000 cannot be retained in the superannuation system.