Child benefit: The Government is unfairly condemning many innocent mums and dads to a poorer retirement
The number of families claiming child benefit has slumped again, blasting a hole in many women’s future state pensions due to a crucial but little known link between the payments.
The latest steep decline is a ‘slow motion car crash’ when it comes to women’s state pensions, and it is ‘hugely unfair’ that innocent parents are penalised because of an overly complex system, claim critics.
The Labour Party has also weighed in, saying: ‘Parents should not be punished later in life for looking after their children.’
Parents – mostly mums – can end up tens of thousands of pounds worse off in retirement by failing to claim child benefit because they aren’t entitled to receive the payments.
When they belatedly realise this will hit their state pension and sign up, they are allowed to backdate credits for three months but lose their right to the rest for good.
The latest official child benefit figures show 7.09 million families were receiving the payments last summer, a fall of around 122,000 compared with a year earlier.
That is down from a peak of 7.92million the summer before a controversial overhaul of child benefit in 2013.
See the chart below, which shows claims plummeting after the Government confirmed the reform in the previous year’s spring Budget.
The shake-up reduces child benefit entitlement for those earning £50,000-plus a year, or wipes it out entirely for those earning £60,000-plus – something officially known as the ‘high income child benefit charge’ or HICBC.
The rules came under fire from the start because they penalise families in which one parent earns just over £50,000, but those where both parents earn just under that amount still get child benefit paid in full.
How much do parents stand to lose in state pension?
Each annual credit is worth 1/35 of the value of the state pension – around £267 per year or £5,337 over the course of a typical 20-year retirement.
But former Pensions Minister Steve Webb says a woman who started a family in early 2013 and didn’t claim child benefit could have missed out on up to nine years of NI credits by now.
‘At current rates this is a state pension shortfall of around £2,400 per year or around £50,000 in missed pension over the course of a typical retirement,’ he says.
Some parents have been unwittingly caught out by tax penalties, because they failed to realise they shouldn’t receive child benefit, including men who weren’t aware their partners were claiming it.
The threshold has not changed since its introduction which means every year more families become ineligible for child benefit, and more new parents are at risk of not signing up and missing out on thousands of pounds in state pension they would otherwise qualify for in retirement.
Parents can submit a claim for child benefit but tick a box to opt out of receiving payments, and only get state pension credits. However, many families don’t realise this and assume they should not make a claim since they do not qualify to receive the money.
The latest child benefit figures show the fall in child benefit claims, but they don’t reveal how many have registered but not taken payments.
Parents who miss out on state pension credits might make them up before retirement by working and paying National Insurance for enough years, or qualifying for them in some other way such as being a carer.
But this is not guaranteed, and parents will not necessarily be well off in their own right, or still married to a partner whose high earnings disqualified them from child benefit, by the time they reach retirement age.
This is Money and our columnist, former Pensions Minister Steve Webb, have long campaigned against the Government unfairly condemning many mums and dads to a poorer retirement over innocent child benefit errors – see the box below.
Why we are campaigning for parents hit by child benefit rules
The Government is unfairly condemning many mums and dads to a poorer retirement.
An innocent paperwork lapse just after having a child shouldn’t bring a penalty of losing tens of thousands of pounds in old age.
We called for the following at the launch of the campaign:
– Full backdating of state pension credits for those who claim child benefit late;
– A review of how credits are awarded, including the feasibility of signing up when registering a birth not via child benefit;
– An overhaul of credit swaps between couples where the ‘wrong’ partner -the one already paying NI towards a state pension – fills in the form. HMRC has since changed the system for parents trying correct these errors.
The Government is risking a new state pension scandal involving a younger generation of women, after failures to communicate a rise in state pension age led to widespread hardship for women currently in their 60s and underpayments worth an estimated £1billion to elderly married women and widows.
Meanwhile, the Government’s in-house tax gurus, the Office of Tax Simplification, said in a report issued three years ago that it was ‘unreasonable’ for parents to lose state pension over child benefit errors they can’t later correct.
They told the Government to find a way to restore credits to parents who have lost them. This month, they renewed this call and suggested it would be worth informing parents about child benefit when they register births.
‘Over the years, HMRC have improved the language on the claim form but it remains complicated and still uses the language of a claim rather than registration and claim,’ said the OTS, which is an independent arm of the Treasury.
Prompting parents to claim child benefit when they register births is supported by Webb, and This is Money called for a review involving birth registrations when we first launched our campaign.
Matt Rodda, Labour’s Shadow Pensions Minister, says regarding the fall in child benefit claims and the future impact on state pensions: ‘This is a real issue that could have serious implications for people’s retirements.
‘It is deeply worrying that despite their own experts raising the issue, this Conservative Government is still refusing to find a solution. Why won’t Ministers step up and take the action needed to fix this problem.’
Webb says the new child benefit figures published by HMRC show that the number of families claiming has fallen for nine years in a row.
The number would be expected to fluctuate from year to year due to changes in the birth rate and migration, but it had gone up in each of the nine years before the child benefit charge was introduced, he says.
Webb, who is now a partner at pension consultant LCP, says: ‘These latest figures represent a slow motion car crash when it comes to women’s state pensions.
‘The creation of the ‘high income child benefit charge’ in 2013 has led to a steep decline in the number of mothers claiming child benefit and in particular in the numbers benefiting from National Insurance credits for time at home with children.
‘Without these credits, women could be losing thousands of pounds in retirement income.
‘As a matter of urgency, HMRC should scrap its rules on backdating claims so that mothers who realise they have missed out can claim their missing NI credits.
Have you lost state pension by not signing up for child benefits or filling form in wrong?
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‘But there needs to be a fundamental rethink of the way parents at home with children get their state pension rights protected as the current system is clearly seriously broken.’
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says of the fall in child benefit claims: ‘These figures are alarming and show many parents are unwittingly undermining their retirement planning by opting out of child benefit.
‘It is understandable that people would opt out to escape having to pay the tax charge but they don’t realise they are also missing out on national insurance credits that go towards their state pension.
‘By the time they realise this they may have lost out on many years’ worth of credits that they can’t get back – it is hugely unfair.
‘More needs to be done to make parents aware of this issue and what they can do to remedy it. For instance, that they can still claim the credit but opt out of receiving the benefit.
‘The backdating issue also needs to be looked at – these parents haven’t done anything wrong and it’s not right that they should be penalised because of an overly complex system.’
What does the Government say?
An HMRC spokesperson said: ‘We encourage all families to claim child benefit to ensure they receive benefits they are entitled to, including National Insurance credits.
‘Comprehensive information on child benefit, including the entitlement to National Insurance credits, can be found on GOV.UK.’
It also makes the following points.
– HMRC has always urged families to claim child benefit, regardless of income, to ensure they receive the monetary and non-monetary benefits to which they are entitled, including National Insurance credits to help maintain eligibility to the state pension.
– Many individuals will not need these NI credits to maintain eligibility to the state pension. They may already be achieving qualifying years for the years in question through other means, for example, if they are working (so paying NI contributions) or receiving NI credits for another reason.
– Under the design of the new state pension, most people of parental age will achieve full payments with 35 qualifying years out of an approximate 50-year working life, and may build up sufficient years even if there are some gaps in their National Insurance record.
– HMRC promotes child benefit through social media channels, the Government’s Start 4 Life emails, and through pregnancy and parenting organisations with which it partners.
– Child benefit claim forms are included in ‘birth packs’ distributed to new parents.
In the past, the Government has claimed it is too hard to verify evidence for child benefit claims older than three months, as entitlement relies on being responsible for a child each week, and so state pension credits are never backdated further than that.
This stance is dismissed by critics, who believe in the majority of cases it will be obvious parents were in charge of their children at the times in question, and they will have school, medical and other paperwork to prove it.
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