Stay-at-home parents, who have not registered for child benefits, could be losing out on state pension credits, but the government has no idea how big that shortfall is, the Treasury select committee revealed today (26 July).
Child benefit recipients with a child under the age of 12 get a national insurance credit towards their state pension.
This means even if they are not in paid work, they are still treated as having contributed when it comes to claiming their retirement benefits.
However, stay-at-home parents can only receive these credits if they apply for child benefit but then waive the payment of it.
In 2013, the government introduced a high-income child benefit tax charge for couples where one partner earns £60,000 per year or more, which effectively wipes out the value of the child benefit.
This may deter some couples from signing up to receiving child benefit, the committee said.
Nicky Morgan, chair of the committee, said it was "concerning" that parents who haven’t registered for child benefit for fear of the higher tax rate charge may be forgoing part of their future state pension.
"This is exemplified by the limited number of new opt-outs of child benefit claimants," she noted.
According to data shared by the HM Revenue & Customs (HMRC) with the Treasury select committee, a mere 7 per cent of the 7.4 million claimants of child benefit in 2017 had opted out of the benefit.
According to analysis conducted by Royal London, changes to the child benefit system in 2013 could have cost mothers, or fathers, more than £23,000 in state pension rights, based on a 20-year retirement.
The total amount in future pension rights lost since 2013 is estimated to exceed £1bn.
HM Treasury secretary Mel Stride said in a letter to Ms Morgan that HMRC will be conducting consumer research to understand more fully "why some parents aren’t claiming child benefit and whether they are aware of the impacts" of not claiming it.
Jon Thompson, chief executive and permanent secretary of HMRC, revealed this research is currently underway, and a report is expected to come out in mid-August.
Ms Morgan said the committee will scrutinise HMRC’s child benefit consumer research to understand the scale of the risk of parents not claiming this benefit.
Kay Ingram, director of public policy at LEBC, said the Treasury committee was right to criticise the current system as being over complicated, especially for those whose earnings fluctuate and may fall either side of the £60,000 limit on earnings from year to year.
She said: "It is especially difficult for the self-employed whose earnings can vary a lot.
"While restricting child benefit was a necessary step the Treasury felt it had to take in the wake of the crisis, this restriction needs reform.
"The earnings threshold hits many middle income earners and is especially unfair on single parent earners."
Data provided by HMRC also showed the proportion of male claimants of child benefit has increased with the number of male claimants rising from 10 per cent in 2013 to 11.7 per cent in 2017.
Ms Morgan said: "A shift in child benefit applications from mothers to fathers, where there is no underlying change in household formation, who earns or childcare responsibilities, represents a potential future pension problem.
"There is a risk – to any household with one person earning and one person not earning but undertaking childcare commitments – that if the sole earner claims child benefit, the non-earner, with childcare commitments, forgoes national insurance credits and, therefore, their entitlement to a full future state pension.
"The committee has asked HMRC to provide it with any analysis of this risk."
She added: "Parents can transfer national insurance credits between themselves without transferring who receives the money, but HMRC does not monitor the number of transfers.
"This is concerning, so the committee has asked HMRC what work it has done to publicise the possibility of national insurance credits transfer."
Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, said he would advise new parents to register for the benefit.
He said: "The worst case is that the higher earning parent will pay it back via the high income child benefit tax charge. If they earn over £60,000 then they will effectively lose all the child benefit."
The HMRC data reveals "the problem lies with who the claimant is for child benefit," he stated.
Mr Chan explained: "For instance, if we assume a traditional scenario of husband is working and wife is stay-at-home mum, and the husband is the one who applies for child benefit, then you have a problem where the wife has no income, pays no national insurance, is also not being rewarded national insurance credits by virtue of claiming the child benefit.
"So this will have an adverse impact on her national insurance contribution history and subsequently could result in a lower state pension when she reaches state retirement age. If it had been the wife claiming the child benefit, there would be no issue. Likewise, if both parents are working and earning enough to accrue state benefits (via national insurance) then this wouldn't be an issue either.
"So, based on this analysis, it would make sense for the person who will be responsible for childcare to claim the child benefit."
maria.espadinha@ft.com
