Child death benefit pensions

By Julie Steed, Senior Technical Services Manager

Child death benefits

A death benefit can only be paid in the form of a pension to the child of a deceased member if the child is:

  • under age 18
  • age 18 or over and either:
    • is financially dependent on the member and under age 25; or
    • has a disability described in section 8(1) of the Disability Services Act 1986.

For a child to meet the disability definition, the child must have a permanent physical or intellectual disability which results in a substantially reduced capacity of the child for communication, learning or mobility and means that they need ongoing support services.

Child cap increment

Where a death benefit is paid as a pension to a child, there is a special transfer balance cap amount - the child cap increment. 

For child death benefit pensions that were commenced prior to 1 July 2017, the child cap increment is $1.6 million for all pensions. Any amount above $1.6 million was an excess and had to be removed from the super system.

Since 1 July 2017, the amount of the child cap increment depends upon whether or not the deceased had a transfer balance account at the date of death. 

Importantly, the test is whether the deceased has a transfer balance account at the date of death, ie they had ever commenced a retirement phase pension, rather than whether the deceased had a retirement phase pension at the date of death. 

If the deceased did not have a transfer balance account then the child cap increment is a pro-rated amount of the general transfer balance cap at the time the child receives the pension, based on the child's proportion of the deceased's total death benefit. 

If the deceased had a transfer balance account at any time, the child cap increment is a pro-rated value of the pension account/s as at the date of death, based on the child's proportion of the deceased's total death benefits. 

A child death benefit pension above the general transfer balance cap may also be possible without having an excess transfer balance amount. This could occur if the parent's pension increases above the general transfer balance cap as a result of investment returns.

Investment returns from the date of death until the date the child pension commences are included in the pension account balance and therefore count towards the child cap increment.

In addition, a child can have multiple child cap increments if multiple parents die. 

It is not an everyday occurrence for a member receiving a retirement phase pension to have a minor child, however they will occur for older clients with younger spouses (think Mick Jagger having a child at age 73). In addition, clients with young children may be in receipt of a disability income stream, and adult children with disabilities will often live with their parent well into the parent's 70s or 80s.

Case study:  Mick held $1.6 million in an account-based pension on 1 July 2017 and did not have an excess transfer balance amount. He dies at age 68 in August 2021 with a pension account balance of $2.2 million, which is to be paid to his only child Ollie who is 16.

Because Mick had a transfer balance account, Ollie's child cap increment is his share of Mick's pension account/s which is 100% of $2.2 million. Ollie can commence a death benefit pension of $2.2 million and does not have an excess transfer balance amount, even though his pension is commenced for an amount greater than the general transfer balance cap of $1.7 million.

If a death benefit is payable from both accumulation and pension benefits then the child is still constrained by the child cap increment, which results in all accumulation balances having to leave the super system.

Case study:  Rachael is a 45 year old single parent who is diagnosed with a debilitating degenerative disease however has a life expectancy of over 10 years. Rachael's beneficiaries are her two children age 10 and 12. Rachael has $300,000 in an accumulation account which has a $1,000,000 insurance policy under which Rachael is claiming a total & permanent disability benefit.

Rachael understands the benefits of tax-free investment returns on pensions and Rachael's fund is satisfied that she has met a disability condition of release. Rachael commences a pension with $300,000 whist awaiting the outcome of her insurance claim.

Unfortunately, Rachael dies before her insurance claim is finalised. The insurance proceeds are received a few weeks after she dies.

Rachael had a transfer balance account at the date of her death, so her children's child cap increment is their share of Rachael's pension account which is 50% of $300,000 each ($150,000). The insurance proceeds that are received into her accumulation account cannot be paid as a death benefit pension and must leave the super system.

If Rachael had not commenced a pension and had died with $1,300,000 in an accumulation account, each of her children could have received a death benefit pension of $650,000.

End of a child death benefit pensions

A child death benefit pension must be commuted by age 25 unless the child has a disability. The pension may end earlier if assets backing pension are exhausted. 

The benefit may also be commuted when the child reaches 18 and requests a commutation unless the fund's trust deed restricts access to an age up to age 25. An SMSF or a small APRA fund would be likely to offer this flexibility however it is unlikely in a large APRA regulated fund.

When the child death benefit pension ends the child's transfer balance account is deleted. The child will then be eligible for the general transfer balance cap when they retire.

Excess transfer balance amount

If the parent had an excess transfer balance at the time of their death, the child death benefit pension is reduced by their proportionate share of the parent's excess transfer balance.


Where an accumulation account includes insurance proceeds, the insurance proceeds form part of the accumulated balance and are included in the child cap increment amounts. 

However, if an insurance policy is held in a retirement phase pension none of the insurance proceeds can be used to start a death benefit pension paid to a child, all the insurance proceeds must be paid as a lump sum. 

Conversely, if an insurance policy is held in a reversionary retirement phase pension that will be paid to a spouse, the insurance proceeds are treated as investment returns and can be retained in the spouse's death benefit pension.

Indexation of a child death benefit pension

A child death benefit pension is not eligible for any indexation. The amount able to be paid as a pension is determined at the time of commencement and cannot be added to (unless by another child cap increment if another parent dies).

Child death benefit pensions summary

The following diagram illustrates the treatment of child death benefit pensions:

transfer balance account Chart.png

The following table illustrates the child cap increment determination for death benefit pensions commenced after 1 July 2017:

Source   Child cap increment Surplus
 Accumulation accounts only no transfer balance account  General transfer balance cap ($1.6 million or $1.7 million from 1 July 2021) proportioned based on benefit received  Lump sum to child
 Accumulation accounts only had a transfer balance account  Nil  Lump sum to child
 Retirement phase pensions and accumulation accounts  Retirement phase pensions shared between all beneficiaries
Nil for accumulation accounts
 Lump sum to child
 Retirement phase pensions only  Retirement phase pensions shared between all beneficiaries  No surplus

SMSFs and child members

Paying death benefit pensions to children can create difficulties in SMSFs. A person who receives a pension from an SMSF is defined as being a member of the SMSF. To meet the definition of an SMSF, a child in receipt of a death benefit pension must also be a trustee. 

Where the child is under 18, this is relatively simple, the child's surviving parent or guardian is the trustee for the child. However, when the child turns 18, they are required to be appointed as trustee and assume all trustee responsibilities. 

For an adult disabled child, it is not so straight forward. If the adult child has a power of attorney, the attorney can be the trustee for the child. However, most disabled child death benefit pensions are paid to adult children with long standing intellectual disabilities that have prevented them from completing a power of attorney document. The alternative is to have a court appointed guardian, which is rarely done if the parents are caring for the adult child as it is generally an arduous and unpleasant process.

A possibility is to convert an SMSF to a small APRA fund which has a professional licenced trustee. This may be beneficial where the SMSF has unique assets.

Fortunately, since 1 July 2017 a death benefit pension can be rolled over to another fund. The SMSF could therefore roll a child's death benefit pension to a retail fund.

Planning opportunities

Not all parents are thrilled at the idea of their 18 year old children having access to commute significant amounts of death benefit pensions. In an SMSF, the terms of the trust deed may restrict the child's access to age 25, by which time parents may be more comfortable with the decisions that their children may make regarding appropriate uses for the death benefit proceeds.

An often overlooked alternative in an SMSF is to have a non-binding nomination that allows a surviving spouse to allocate death benefit proceeds between themselves and children, maximising the amount that is retained as superannuation death benefit pensions. This also means that binding nominations don't have to be updated as circumstances (and account balances) change.

In a retail or industry fund there may be less confidence in the trustee's decisions for non-binding nominations however a similar outcome may be achieved by assessing the best outcome annually and making binding nominations to that effect. 

For clients who have retirement phase pensions and accumulation accounts, it may be appropriate to leave all the pension benefits to the children equally and all the accumulation accounts to the surviving spouse.

In many instances, parents will be far more concerned about control than the potential tax benefits of retaining death benefit pensions in the super environment. Clients may look to commence child death benefit pensions that are expected to have a zero balance by the time the child is 18. Each year they may work with the adviser to estimate the amount required to support the child's lifestyle needs until they turn 18. The balance can be directed to testamentary trusts or to a surviving spouse. Of course, the estimates will never be perfect but will greatly reduce the likelihood of the child having access to large sums of money at 18.

In an SMSF this can be also achieved by using non-binding nominations. In a retail fund, binding nominations could be updated annually.

Case study:  Jeff is 64, is married to Emily who is 32 and they have two children Charlie age 6 and River age 4. Jeff dies on 1 August 2021 with a retirement phase pension account of $2.2 million and an accumulation account of $2 million in the Gold SMSF. Jeff and Emily are the members and directors of the corporate trustee. 

Jeff has a non-binding nomination and Emily will be the director making decisions regarding the distribution of the death benefit. Emily wants to retain as much of Jeff's benefit in the superannuation environment as possible.

Emily can allocate all of Jeff's pension account to be paid to the two children equally, giving them a death benefit pension of $1.1 million each. From the accumulation account, Emily can commence a death benefit pension for herself of $1.7 million and take $300,000 as a lump sum benefit, meaning only $300,000 is paid out of super and $3.9 million is retained in super.

If the children were 16 and 14, Jeff and Emily may not be comfortable with them having access to around $1 million in 2 and 4 years' time. They could update the SMSF trust deed to restrict access until age 25 and/or Emily could allocate a larger share to herself or Jeff's legal personal representative.


Understanding how child death benefit pensions interact with the transfer balance cap can assist practitioners in providing appropriate advice to clients, particularly clients with young or disabled children.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.