"Many couples may not realise that simply having the Child Benefit in the name of the higher earner rather than the lower earner could cost them dearly."
There are currently 200,000 couples where the ‘wrong’ partner is claiming Child Benefit, according to a Freedom of Information reply from HMRC to LCP.
In these couples it is the higher earner who is getting the Child Benefit. The lower earner (or non-earner) is – as a result – missing out on National Insurance credits to protect their state pension. In most cases the lower earner is a woman, which means that the decision to claim Child Benefit in the name of the higher earner will further increase the gender pension gap.
Under current rules, where someone receives Child Benefit for a child under 12 they are also treated as if they had paid National Insurance Contributions for that week. But this National Insurance ‘credit’ only goes to the person who claims the Child Benefit. In these 200,000 families there is one partner who could potentially benefit from the credit because they are not in paid work (or on a very low age) but the child benefit is in the name of the other partner. Although there is a process for getting these NI credits reallocated at a later stage, this is complex and many couples may be unaware of it. As a result, their state pension may suffer lasting damage. Many older parents whose children have now grown up may have historic gaps in their NI record for this reason and need to check their record.
Steve Webb, former pensions minister and partner at LCP, says this is an issue advisers and planners should be discussing with their clients – including older clients whose children have grown up and where a wrong decision in the past could be damaging their pension future.
HMRC point out that not everyone who misses out on a credit will necessarily suffer a reduced pension. This is because they may build up the 35 years needed for a full pension during the rest of their adult life. But where they do miss out, the loss could be substantial. One year short would cost someone 1/35 of a full pension every week of their retirement. This is £5 per week, £260 per year or £5,200 over a twenty year retirement. If just half of the 200,000 couples are affected in this way, the combined loss each year could be £520m in pension rights.
For an individual family, suppose that the lower earner stays at home until the child is aged 4 and misses out on four years of credits. This will cost that individual over £1,000 per year on their pension or over £20,000 through their retirement.
Steve Webb commented: “Many couples may not realise that simply having the Child Benefit in the name of the higher earner rather than the lower earner could cost them dearly. National Insurance credits are a vital way of protecting the retirement position of those who spend time caring for others. The majority of those who are currently missing out are mothers with young children. It is simply unacceptable that they should suffer a pension penalty as a result. HMRC needs to do much more to make people aware of the impact of the choice over who gets Child Benefit as well as encouraging people to check their NI records where the wrong choice has been made in the past.”