Thousands of mothers are missing out on state pension rights according to the ninth Royal London Policy Paper.
Focusing on the large amount of mothers estimated to be missing out on state pension rights, the ninth Paper believes that this could be due to Child Benefit system changes for higher-earning families.
The Government brought in High Income Child Benefit Tax Charge in January 2013.
This meant where one or both parents within a family receiving Child Benefit with an income in excess of £50,000 annually, a tax charge is incurred.
For each £100 over the annual £50,000 income, the tax charge is levied at a rate of 1% of the Child Benefit.
Therefore, where an individual’s income was £50,200, the charge would be 2% of their Child Benefit, whereas for someone earning £60,000 annually, the tax charge would be equal to 100% of the rate of Child Benefit in payment.
The tax charge cannot amount to more than the total amount of paid Child Benefit.
In response to the charge, the paper reports that two things have occurred based on HM Revenue & Customs (HMRC) statistics.
The first is that almost half a million receiving Child Benefits have ‘opted out’ of receiving it, in order to avoid the tax charge on the higher earner. The figure is primarily made up of mothers, as by default, they receive the Child Benefit.
The second is that for mothers who have given birth after January 2013, increased numbers have not made the initial Child Benefit claim, potentially as they cannot see any short-term benefit, financially speaking.
For those in the first group, largely consisting of mothers who have been in the Child Benefit system previously, a transitional arrangement has been introduced. This involves the National insurance credits (NI), to which Child Benefit recipients are entitled, continuing to be distributed despite the receipt of Child Benefits being opted out of.
No such arrangement however, applies to those in the second group. Where entitlement to Child Benefit is never claimed by a new mother, NI credits will not be added. In respect of the mother’s future entitlement to state pension, this could have long-term consequences as highlighted in the report.
Following a period of paid maternity leave, new mothers will commonly return to work and have a continuous record of paying NI contributions. The state pension record will therefore be protected and the NI credit absence will no longer be relevant.
It is estimated however, that of the mothers who are not claiming Child Benefit, 30% would not otherwise accumulate a ‘qualifying year’ of contributions towards their state pension. They could therefore reach retirement with a state pension below the full-rate amount, for which 35 years of contributions or credits are needed.
From the statistics published by HMRC each year, there is evidence that the number of Child Benefit claims made has fallen in regards to children born after January 2013. Commenting on the figures, HMRC have acknowledged that this is likely to be a problem.
Observing 2014/15 and 2015/16, the policy paper indicates that a total of £278m in state pension rights may have been foregone, with the loss potentially reaching over half a billion pounds by the end of the financial year. Geographically, losses are highly concentrated, likely to reflect the highest earning areas in the country, with over 50% of losses stemming from London based families, as well as those in the South-east and the East of England.
New mothers are therefore being encouraged to claim for Child Benefits in order for NI credit contributions not to be lost and in turn, not impact pensions. For mothers who wish to avoid receiving Child Benefit and being subjected to the tax charge, a box can be ticked to be put on a ‘nil rate’ of benefit.
HMRC are also being urged to work in partnership with registrars and other relevant individuals to maintain these rights for new mothers. The pension system has undergone large overhaul in order to achieve greater equality between men and women. In light of this, the fact that mothers were receiving reduced pensions simply due to the changes in the Child Benefit system was deemed unacceptable.
