Article by Steve Webb, Director of Policy and External Communications, Royal London
A recent Royal London Policy Paper discusses how thousands of mothers are missing out on state pension rights when they don’t have to.
Earlier this month Royal London published their ninth Policy Paper, entitled ‘Mothers Missing out on Millions’ which focuses on the thousands of mothers who we estimate could be missing out on state pension rights because of the changes to the Child Benefit system for higher earning families.
You may recall or be aware that in January 2013, the Government introduced something called a ‘High Income Child Benefit Tax Charge’.
- Under this scheme, where one or both parents in a family receiving Child Benefit have an income over £50,000 per year, a tax charge is incurred.
- The tax charge is levied at a rate of 1% of the Child Benefit in payment for each £100 of annual income over £50,000.
- For someone with an income of £50,200, the charge would therefore be 2% of their Child Benefit, whilst for someone with an income of £60,000 or more, the tax charge would be equal to 100% of the rate of Child Benefit in payment.
- The tax charge cannot exceed the total amount of Child Benefit being paid.
In the policy paper, Royal London report that two things have happened in response to the charge, based on the statistics published by HM Revenue and Customs who administer the Child Benefit system.
- Nearly half a million child benefit recipients (overwhelmingly mothers, as child benefit is paid by default to the mother) have ‘opted out’ of receiving child benefit. Rather than continue to receive child benefit and incur a tax charge on the higher earner, these mothers have simply opted out and no longer receive child benefit.
- Growing numbers of mothers who have had their first child since January 2013 have declined to make an initial claim to child benefit, presumably because they can see no short-term financial benefit in doing so.
For the first group, namely those mothers who have previously been in the child benefit system, a transitional arrangement has been put in place whereby the National Insurance credits to which Child Benefit recipients are entitled will remain in force, even though they have ‘opted out’ of receiving child benefit.
But for the second group, no such arrangement is in place. If a new mother simply never claims her entitlement to child benefit then no credits are added to her National Insurance (NI) record. As the report discusses, this could have damaging long-term implications for her future state pension entitlement.
In many cases, a new mother will return to paid work after a period of paid maternity leave and will thereby have a continuous record of paying NI contributions. This will protect her state pension record and so the absence of National Insurance credits will be of no relevance.
But Royal London estimate that around 30% of the others who are not claiming child benefit would not otherwise build up a ‘qualifying year’ of contributions towards their state pension. As a result, they could reach retirement with a state pension below the full flat rate amount for which 35 years of contributions or credits are required.
The impact of missing one year of contributions:
Simply because of failing to make a claim for child benefit.
There is clear evidence from the statistics which HMRC have published each year that the number of child benefit claims in respect of children born since January 2013 has fallen markedly, and HMRC’s own commentary on the figures acknowledges that this is likely to be an issue.
The policy paper shows that looking just at 2014/15 and 2015/16 a total of £278 million in state pension rights may have been foregone, and that the loss could easily exceed half a billion pounds by the end of the current financial year. Losses are strongly concentrated geographically, no doubt reflecting the areas of the country where earnings are the highest, with more than half of all losses coming from families in London, the South East and the East of England.
We would therefore urge new mothers to make a claim for Child Benefit to make sure that they do not lose out on valuable NI credits towards their pension. If they wish to avoid receiving child benefit and incurring a matching tax charge, they can simply tick the box to be put on a ‘nil rate’ of benefit.
Royal London are also calling on HMRC, working in partnership with registrars and others who are in contact with new mothers, to do more to ensure that these important rights are not lost. After decades of progress in achieving greater equality between men and women in the state pension system, it would be totally unacceptable if we were to revert to a situation where mothers end up with reduced state pensions, simply as a by-product of changes to the Child Benefit system.
The full policy paper, ‘Mothers Missing out on Millions’ can be found along with all their other policy papers at http://www.royallondon.com/about/media/royal-london-policy-papers/
About the Author
Steve Webb is now Director of Policy and External Communications at Royal London. Before this he was Minister of State for Pensions between 2010 and 2015, the longest serving holder of the post. During that time he implemented major reforms to the state pension system, oversaw the successful introduction of auto enrolment and played a key role in the new pension freedoms implemented in April 2015.