The Office for Tax Simplification has urged the government to make it easier for parents to claim child benefit related national insurance credits in order to bolster their state pension.
In a 93 page report published yesterday (October 10), the OTS stated the government should review the current child benefit arrangements, with a view to ensuring that people do not lose out on state pension entitlements.
According to HMRC about 3 per cent of those eligible for child benefit (200,000 people) may be missing out on national insurance credits because the recipient of child benefit is the working parent, rather than the non-working parent.
Under the current rules stay-at-home parents with a child under the age of 12 are entitled to NI credits but they can only access those credits if they apply for child benefit and then waive the payment of it, and many households are not aware of this.
The problem was made worse in 2013 when 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 and may deter some couples from signing up.
According to calculations from Royal London, one year of missed contributions can reduce state pension rights by 1/35 of the full rate.
This is about £244 per year of lost pension or £4,880 over the course of a typical 20-year retirement for each year of contributions missed.
A mother who started a family in 2012 and has not claimed child benefit in each year from 2012/13 to 2017/18 could have lost up to six years' of credits, reducing her annual state pension by £1,464, a total of almost £30,000 in lost pension through her retirement.
The OTS also called on the government to consider the potential for enabling national insurance credits to be restored to those who have lost out.
However, the government has so far refused to allow people to backdate child benefit claims by more than three months.
Rachael Griffin, tax and financial planning expert at Quilter, said it was encouraging to see the OTS acknowledge the counter-intuitive nature of claiming child benefit and its need to be amended.
She said: “A sleep deprived overwhelmed new parent is presented with reams of new responsibility and information. There will be numerous things on their mind, but what isn’t likely to be one of them is their state pension.
“In fact that’s unlikely to cross their mind until they come up for air, which could take months. And yet the government is claiming that three month leeway on appropriately filling out a child benefit form is enough.
“This limited timeframe is even more absurd when you consider that parents who are subject to the high income child benefit charge, and therefore don’t need to claim child benefit, still need to fill out the form so they can get national insurance credits.”
According to Tom Selby, senior analyst at AJ Bell, it is “good the OTS have identified that it’s ‘unreasonable’ the system works in this way, and that individuals can unfairly miss out on vital state pension in later life because they haven’t claimed the benefit."