WILL YOU MISS OUT ON PENSION MONEY?
A change in the rules could leave you worse off in retirement
Motherhood is like a permanent admin battle, so you’d be forgiven for not adding an application for Child Benefit to your already towering paperwork mountain.
But not registering for Child Benefit has a bigger impact on your finances than you might think. While it used to be open to anyone, since 2013 – following a change to the law – this benefit depends on household income and anyone above a set threshold is required to complete a tax return. If a parent is earning more than £60,000, they will face a tax bill – known as the High Income Child Benefit Tax Charge – equal to the amount of
Child Benefit the family is receiving, essentially cancelling out the benefit.
For those earning between £50,000 and £60,000, a portion (1% for every £100) also has to be repaid. Those no longer entitled to the full amount can either continue to receive payment, then pay it back via a tax bill or tick a box on the Child Benefit claim form to say ‘no’ to the payments. Sounds like a headache, right? This is why many stay-at-home parents do not fill in the form in the first place – and this is where the problem arises. Not claiming Child Benefit and, more specifically, not filling in the form, means that your National Insurance (NI) contributions are not protected, and this can hit your pension pot.
HOW IT WORKS
If you’re a parent who registers for Child Benefit, you automatically receive NI credits which, in turn, count towards your State Pension. If you’re not working, then these NI credits are important. To receive a full State Pension, you must accumulate at least 35 years of NI credits, but if you’ve taken time out to raise a family, you’re likely to face a shortfall. This shortfall could be worth as much as £25,000 in retirement, according to Royal London.
‘If you reach pension age with 34 years of NI credits/contributions, rather than 35 years (because you missed out on one year of credits), you lose 1/35 of a State Pension,’ says Steve Webb, its director of policy. ‘The State Pension is currently £164.35 a week, so you would lose £244 per year. If you are retired for an average of 20 years, that adds up to £4,883 for each year of credits you have missed out on. So, someone who has missed out since 2013 could lose nearly £25,000* in retirement.’
This change will affect whichever parent takes time off to look after their children. Remember that if you or your partner is working, then either of you will be accumulating
‘THE RULES HIT STAYAT-HOME PARENTS’
both a workplace and State Pension – and will not be affected. However, Royal London estimates that around 50,000 to 100,000 women could be missing out on NI credits.
So, what now? When the current rules were first introduced in 2013, their potential impact was unclear. But a few months ago, Nicky Morgan, chair of the Treasury Committee, warned that the ‘link between National Insurance credits and
Child Benefit is poorly understood by the public’, and that ‘stay-at-home parents risk losing out on pensions.’
Webb agrees. ‘Until the change came in, the number of families claiming Child Benefit had been rising every year, but you can see a dramatic drop after 2013. In August 2012, there were 7.92m families getting Child Benefit. But by August 2017, there were 7.38m – a fall of just under half a million.’
What’s more, because of the complexity of the new rules, many parents have failed to tell HMRC that they have been affected by this charge and have been hit with fines of up to £2,000. Some are also being sent backdated bills for years of overpayments. In its defence, HMRC says it has run publicity campaigns informing parents of their duties and that they have no excuse for getting things wrong. But many disagree, saying that items such as a company car can unwittingly push you over the £50,000 threshold. Many people have also had pay rises since the rules were announced and haven’t realised they needed to notify HMRC. Nevertheless, there are things you can do, whatever your situation.