The government plans to take action on the state pension gaps caused by parents who opt out of the child benefit.
Since the high income child benefit charge was introduced in 2013, the number of families claiming child benefit has dropped every year.
In August 2012, the number of families on child benefit stood at 7.9mn but this has now dropped to 7mn.
Those who have decided not to claim are typically higher income couples who have decided that claiming child benefit and incurring a tax charge for the same amount was a waste of time.
However, there is a risk that if they simply make no claim at all they will miss out on the valuable national insurance credits which go to those who get child benefit for a child under 12.
In a series of documents aimed at simplifying and modernising the tax system published yesterday (April 28), the government has indicated that it plans to address this issue.
For NI credit changes, it said: “The government recognises concerns that some parents who have not claimed child benefit could miss out on their future entitlement to a full state pension.
“The government will address this issue to enable affected parents to receive a National Insurance credit retrospectively. Further detail on next steps will be available in due course”.
As part of the existing rules, parents have the option to claim just the NI credits - and not the cash - but many simply do not claim at all.
Consultants LCP said where people realise they have missed out, they can put in a child benefit claim but under current rules it will only be backdated for three months.
Steve Webb, partner at LCP, who has campaigned on this issue for several years, said: “Whilst it is understandable that some parents may choose not to claim child benefit payments, it is vital that parents do not damage their state pension as a result.”
If effective action is taken, it should be possible that those who have missed out on credits could now be awarded them and fill gaps in their NI record, LCP explained.
Webb said: “Until now the problem has been that there was a three month time limit on backdating of child benefit claims, meaning that the damage would be permanent.
“I am delighted that the government has finally listened to campaigners and plans to make changes which will boost the state pension of thousands of parents, and particularly many mothers who might otherwise have missed out.”
Steven Cameron, pensions director at Aegon, said allowing parents who did not claim child benefit to apply retrospectively for state pension credits will also help reduce pensions gender gap.
“It’s great news that eligible parents who didn’t claim child benefit will be able to claim state pension credits retrospectively,” he said.
“If a parent is eligible for child benefit, but they or their partner has an income of over £50,000, special tax charges can cancel out the child benefit payments.
“This leads to some not bothering to claim, but there’s another key benefit in claiming which many people are not aware of.”
‘Laughable rules’
The announcement by the government was welcomed by the industry.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the firm is looking forward to seeing more detail on how the government will address this issue.
“The introduction of the high-income child benefit tax charge meant that for some families it was much easier to not claim the benefit at all rather than go through the rigmarole of claiming it and then having to effectively repay it through self-assessment,” she said.
“However, many people simply didn’t realise that by not claiming child benefit they were potentially missing out on all-important national insurance credits that help them build their state pension entitlement.”
Meanwhile, Cameron explained that registering for child benefit entitles a parent to NI credits which count towards their future state pension. To qualify for the full state pension, you need 35 years of NI credits.
“Taking a break from employment, but not claiming child benefit, could leave a parent short of the 35 years and mean their state pension is reduced.
“In future, subject to final rules, those who find themselves in this position will be able to put in a retrospective claim. As it’s more often women who take career gaps to care for children, this measure is a helpful step towards reducing the gender pensions gap.”
Shaun Moore, tax and financial planning expert at Quilter, added: “It is laughable that the rules dictate that you must claim child benefit as soon after your child’s birth as possible and can only backdate it by three months.
“Most parents can attest that the first few months after a baby is born is a blur without having to worry about filling in paperwork on top. This is a problem that has plagued the system for years, and it is astounding that it has taken this long to address it.”
sonia.rach@ft.com
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