Tens of thousands of new mothers could each end up losing almost £5,000 of state pension when they are older due to an unintended quirk in the rules surrounding child benefit, according to a former government minister.
Steve Webb, ex-pensions minister, said the women, currently totalling around 50,000 but with the number rising every year, may have lost out on more than half a billion pounds in state pension rights over the past three years as a result of a wider clampdown on entitlement to child benefit. Webb makes the claim in a new report published by mutual insurer Royal London, which concludes that urgent action needs to be taken to deal with this problem “before a whole generation of women reach pension age with incomplete pension records”.
This is a sensitive area for the government because of an ongoing row about thousands of women born in the 1950s who say that controversial changes to the state pension age have left them facing financial hardship. The new claims relate to rules introduced in 2013 which mean that families where one parent earns more than £60,000 a year are hit with a tax charge which wipes out their entire child benefit payment. The rules, known as the high income child benefit charge, also affect people earning £50,000-plus, because once you hit this level of income child benefit is gradually clawed back until you receive nothing at £60,000.
Those in this position can choose to carry on receiving their child benefit, but if they do they have to pay extra tax, which will cancel out some or all of the money they get. Many people have opted to give up the benefit so they don’t have to pay the extra tax.
However, the problem highlighted by Royal London relates particularly to those higher-earning households who when starting a family decide not to bother claiming child benefit in the first place, because most or all of it will be clawed back via tax.
These people may not realise that under the current national insurance system, a parent – usually the mother – receiving child benefit for a youngster under the age of 12 gets a year of NI credits towards their state pension record. This means that even if they aren’t in work and don’t pay NI contributions, their state pension is protected. However, the failure to even make an initial claim for child benefit means that the year of NI credits is never triggered, and the parent will miss out.
Missing out on a year of NI contributions could prove very costly later on. “Being one year short at the end of your working life could cost nearly £5,000 in missing state pension rights through the course of a typical retirement,” the report says. The company adds: “Growing numbers of mothers are simply not claiming child benefit in the first place and thereby losing out on valuable credits towards their future state pension rights.”
The full state pension is currently £155.65 a week, based on 35 “qualifying years” of NI contributions and credits. Assuming a woman ends up with 34 thirty-fifths rather than 35 thirty-fifths, she will lose one thirty-fifth of that full rate of £155.65 a week, which is £231 per year, or more than £4,850 in total assuming a 21-year retirement.
The number of people potentially missing out stood at an estimated 37,500 in 2015-16, and is rising at roughly 20,000 a year, so will be more than 50,000 by the end of the current financial year, says Webb, who is director of policy at Royal London.
