Reports about how unclaimed child tax benefits can hit pensions have been in the news this week and Stockport Accountants, IN Accountancy, have looked at how higher-earning households are affected.
Steve Webb, ex-pensions minister and now a director of mutual insurer Royal London, has said that tens of thousands of people could each end up losing almost £5,000 of state pension when they are older, for every year of unclaimed child tax benefits, due to unintended rules surrounding the benefit.
How the child benefit rule change hit higher earners
Before 2013 everyone got the same amount of child tax benefit whatever their income but since then, ‘the high income child benefit charge’ applies if either person in a couple earns between £50,000 and £60,000, resulting in reductions of the benefit on a sliding scale, with no benefit received at earnings of £60,000 plus.
This rule change has meant that many higher-earning households, who when starting a family, decide not to bother claiming child benefit in the first place, or they stopped claiming it in 2013, because most or all of it would be clawed back in tax.
Why it’s a problem if you don’t claim child benefit
If a parent decides not to claim the benefit for a child and they also don’t work, they miss out on the ‘credit’ they would otherwise have received towards the 35 ‘qualifying years’ they need to receive a full state pension. By working and paying national insurance they would automatically contribute to their state pension qualifying years. If they are not working, the advice is that they should claim the benefit for each year they don’t work, even if the income is taken back in tax, just so they are credited with the qualifying years for their pension.
The easy solution
If a parent does not want to claim and pay the tax charge, an easy solution is to still claim child benefit but at a nil rate (and there’s a section on the form where you can do this). While some people might think that only women need to fill in this form because the issue just affects ‘stay-at-home’ mums, the reality is that it could just as easily affect a non-working dad.
Of course many parents will make up the missed national insurance contributions if they return to work and achieve 35 years qualifying years by the time they retire but the problem is if they don’t, they could miss out.
The sums show it pays to claim
And while many of you may cry ‘oh not another HMRC form’ the sums do add up, as according to the Royal London report, ‘for every year that a person misses out on NI contributions, it could cost nearly £5,000 in state pension over the course of a typical retirement’.
The full state pension is currently £155.65 per week based on 35 qualifying years of NI contributions. Assuming a person ends up with 34 thirty-fifths rather than 35 thirty-fifth, they will lose one fifth of the full rate of £155.65 per week, which is £231 per year, or more than £4,850 in total assuming a 21 year retirement. And it follows that the longer the stay-at-home parent does not work or does not claim child benefit, the more they will be missing out later in life.
Protection for those who claimed up to 2013
For those people who stopped claiming child benefit after the 2013 rule change, transitional arrangements mean they will still get NI credits for the child they claimed for, until that child reaches the age of 12.
In summary, high earners who don’t think child benefit is relevant to their household, should still complete claim form CH2 which can be obtained from HMRC.
Thank you to In Accountancy for contributing this article.