If your first child was born since 2013 and you don't bother claiming child benefit because of means-testing rules, you could be putting your state pension at risk – act NOW to protect it.
New research by insurer Royal London has found the introduction of child benefit means-testing in 2013 has led to tens of thousands choosing not to claim the benefit.
But for every year you don't claim, you could lose £231/year from your state pension – even if your partner's income means you wouldn't have been entitled to keep any of the benefit you claimed.
The Royal London researchers estimate that as a result of this little-known loophole, new parents have missed out on a whopping £278 million in state pension entitlements since the new child benefit rules were introduced. (While a few dads are affected, it's mainly mums who have missed out – roughly 95% of all child benefit recipients are women.)
Here's what you need to know and what to do to protect your pension.
Who's affected by this problem?
You could be putting your full state pension in jeopardy if ALL of the following apply:
- Your first child was born on or after 1 Jan 2013. (If you have other children who were all older than 12 by January 2013, and you then had another child after 1 Jan 2013, you could also be affected.)
- You're not working, or earn less than £5,824/year (and therefore don't earn national insurance (NI) credits).
- You don't claim child benefit. Many now don't bother to claim because the payments are means-tested – if your partner earns more than £50,000/year, child benefit payments are either reduced or stopped completely (depending on how much they earn).
Why does not claiming child benefit affect your pension?
To claim a full state pension you'll need 35 years' worth of NI credits or contributions – those without a full record can only claim a reduced pension.
If you're a parent claiming child benefit for a child under 12, you'll automatically get NI credits towards your state pension record if you don't work, or don't earn at least £5,824/year. (You don't earn NI credits when claiming benefit for children above this age.)
Yet since the introduction of means-testing, 100,000s of parents have stopped claiming child benefit.
Why are only new parents losing state pension entitlement?
If you were claiming child benefit at the time means-testing was introduced in January 2013 and have since stopped claiming even though you're still eligible, there won't be any impact on your state pension entitlement, as under transitional rules you'll continue to get NI credits.
However, anyone who's had their first child since January 2013 doesn't have this transitional protection. A few others may be caught up in the changes too – if you previously had one or more children and they were all older than 12 by January 2013, and then you had another child, you may be affected.
So how much could I be losing from my state pension?
The Royal London researchers warn that if you miss a year of NI contributions and don't make it up (see more on this below) you'll lose 1/35th of the full rate state pension (currently £155.65/week).
That's equivalent to £4.47/week or £231/year. What's more, they say on average this will cost pensioners £4,851 over the course of their retirement (based on a woman's average 21-year life expectancy after reaching state pension age).
Who can claim child benefit?
Child benefit used to be a universal benefit paid automatically to all parents of children aged 16 or under, but since January 2013 it's been means-tested.
- If both parents individually earn less than £50,000 a year, you get the full amount of child benefit – currently £20.70/week for first or only children, and £13.70/week for each additional child.
- If one parent earns between £50,000 and £60,000 a year, a 'high income child benefit tax charge' is levied on that £50,000+ income, which has the effect of reducing the child benefit payment by 1% for each £100 earned over the £50,000 threshold. For example, a mother whose partner earned £50,500 would lose 5% of the full child benefit.
- If one parent earns over £60,000 a year, the tax charge means the child benefit payment is completely cancelled out – so effectively they now get nothing.
The reason for the tax charge being introduced at £50,000 is to ensure that lower earners' access to child benefit payments is not jeopardised by higher earners claiming the same level of benefit.
Only one parent can claim child benefit – typically it's mums, though a few dads claim too.
I'm a new parent – how can I protect my state pension?
If you haven't been claiming child benefit and your partner earns over £50,000/year, there are two ways to ensure you continue to get NI credits and don't lose state pension entitlement:
- Claim child benefit as normal, then your partner pays tax on it. This option makes most sense if your partner earns between £50,000 and £60,000/year. In that case, they will pay less in tax than the full benefits you get back – and crucially, you'll continue to get NI credits.
- Claim child benefit, but at a 'zero rate'. This option makes most sense if your partner earns over £60,000/year. You won't actually receive any child benefit – but again, you will get NI credits. To apply for this zero rate child benefit, tick a box on the child benefit application form – it's in section 4 on 'Higher Income Earners'.
In both cases the child benefit claimant will still be entitled to NI credits, providing they're claiming for a child under the age of 12.
I opted out and missed out on NI credits – is there anything I can do?
If you opted not to claim child benefit, so long as you have a child under 12 it's not too late to opt in again. As above, you can choose to either claim child benefit as normal and have your partner pay tax on it, or claim at a "zero rate". Once claiming, you'll start earning NI credits – but unfortunately you can only backdate your child benefit claim by three months.
If you're worried you've missed out on NI credits and think it may affect your state pension entitlement, you can check how many years of credits and contributions you've currently built up – see the Gov.uk website for help doing this.
If you do have gaps in your NI record, you may be able to fill them by paying voluntary NI contributions. However, only certain groups of people are eligible to do this – and the rules also depend on your age. See the Government's Voluntary NI guide for more information.
How many new parents are affected?
Royal London's researchers estimated the number of new mums not claiming child benefit and therefore potentially missing out on state pension entitlement as 19,000 in 2014/15 and 37,500 in 2015/16 – and they've warned the number is likely to rise further.
What does Royal London say about the issue?
Royal London policy director Steve Webb says: "Providing national insurance credits to parents looking after young children is a vital part of the system. It has protected millions of mothers over the years since it was first introduced.
"But there is now clear evidence that this protection is being undermined because of child benefit changes introduced in 2013. In a relatively short period of time, mothers have lost out on hundreds of millions of pounds in state pension rights and this situation is getting worse with every passing year.
"It is vital that HMRC takes action to ensure that these women get the national insurance credits which should be theirs by right. Otherwise the cause of gender equality in state pensions will have been set back a generation. We would also encourage any new mother who has not yet made a claim for child benefit to do so. Even applying for a nil award will ensure that her state pension rights are protected."
What does HMRC say?
An HMRC spokesperson says: "We have always been clear that families can submit the child benefit claim form to help protect their future right to the state pension.
"We provide specific information to all new parents and on Gov.uk. If anyone is worried about their national insurance record, they can contact HMRC at any time to check how many years of credits and contributions they have built up."