What is the impact of the cap increment?

The cap increment limits the amount of a child pension which can be paid as a pension.  If the value of the pension is greater than the cap increment, the excess value must be commuted and paid as a lump sum to or for the benefit of the child, which has the effect of ensuring that the excess is taken out of the superannuation system.

In the case of account-based pensions, the value of the pension is simply the initial pension account balance.

If a child has two or more separate cap increments, the unused portion of a cap increment cannot be used to reduce the excess portion of a child pension which is subject to a different cap increment.

Example 4

Tony, the only child of Edward and Molly, is entitled to receive his deceased parents’ superannuation benefits as child pensions.  Neither parent was in pension phase at the date of death.  Tony is entitled to a pension whose initial balance is $1.9m from his father’s superannuation interest.  Tony is also entitled to a pension whose initial balance is $1m from his mother’s superannuation interest.

Each pension is derived from a different source and so each pension is subject to separate cap increments.  The cap increment for the father’s interest is $1.6m while the cap increment for the mother’s superannuation interest is $1.2m.  The reason for this difference is explained in Example 7.

The pension payable from his father’s superannuation interest exceeds by $300,000 the applicable cap increment of $1.6m.  Consequently, not more than $1.6m of this father’s interest can be paid as a pension while at least $300,000 has to be paid as a lump sum.

The pension payable from his mother’s superannuation interest does not exceed the applicable cap increment of $1.2m.  The cap increment is unused by $200,000.  Consequently, the entire benefit can be paid as a child pension.

However, the unused portion of the cap increment in respect of his mother’s superannuation interest – being $200,000 - cannot be used to reduce the excessive portion of Tony’s benefit which is derived from his father’s superannuation interest.