Pensions diminished when child benefit missed
Sarah Bradford explains why parents should claim child benefit in order to preserve entitlement to their own state pension, even if they later opt-out of receiving the benefit.
To qualify for the full single-tier state pension, a person needs 35 full qualifying years of national insurance contributions. There are various ways to make a tax year a qualifying year, the most obvious of which is by paying sufficient NIC for each week of that tax year. For employees, this means Class 1 NIC, and for the self-employed: Class 2 NIC.
However, the national insurance system also provides for a number of NI credits, which may help fill in gaps in a person’s national insurance record and complete a qualifying year or years.
Types of credits
There are two types of NI credit: Class 1 and Class 3. Class 1 credits count towards the state pension and also towards some contribution-based benefits, such as contribution-based jobseeker’s allowance, whereas Class 3 credits only count toward the state pension.
NI credits are payable in certain circumstances where people are not working. This may be because the individual is unemployed, disabled or looking after someone else. Some credits are given automatically, others must be claimed. The following individuals may be eligible for NI credits:
- those on jobseeker’s allowance and not in education or working more than 16 hours a week: Class 1 credits are given automatically;
- individuals looking for work but not on jobseeker’s allowance: contact the local jobcentre to claim Class 1 credits;
- those receiving employment support allowance or unemployability supplement or allowance: Class 1 credits are given automatically;
- individuals who do not receive employment support allowance but who meet the conditions for it: contact the local jobcentre to claim Class 1 credits;
- employees receiving SSP, SMP, SPP, SAP or ShPP where their earnings are not sufficient for the year to be a qualifying year: Class 1 credits can be claimed by writing to HMRC’s National Insurance Contributions Office;
- individuals receiving maternity allowance: Class 1 credits are given automatically;
- carers receiving the carer’s allowance: Class 1 credits are given automatically;
- carers on income support who provide regular and substantial care: Class 3 credits are given automatically;
- other carers who are caring for a sick or disabled person or at least 20 hours a week: Class 3 credits can be claimed;
- family members between the ages of 16 and state pension age who are caring for a child under 12 (usually while the parent is at work): adult childcare Class 3 credits can be claimed;
- foster carers: Class 3 credits can be claimed;
- working tax credit claimants: Class 1 credits are given automatically if they receive the disability premium, and Class 3 credits otherwise;
- people on universal credit: Class 3 credits are given automatically.
NI credits are also available to people aged over 18 who are enrolled on government-approved training courses, and to people while they are on jury service. The spouses and civil partners of members of the armed forces who relocated to an overseas posting with their partner may also be eligible for NI credits on returning to the UK.
Child benefit and NI credits
Parents registered for child benefit for a child under 12 receive Class 3 credits automatically. These count towards the state pension and are important in ensuring that stay-at-home parents and those working part-time but not earning enough to pay NIC, continue to build up their state pension entitlement while bringing up a family.
However, since the introduction of the High Income Child Benefit Charge (HICBC), many parents haven’t registered for child benefit. The HICBC starts to claw back child benefit when the income of the highest earning partner reaches £50,000, at the rate of 1% of the child benefit paid for each £100 by which income exceeds £50,000. Once that earner’s income reaches £60,000, the HICBC equals the child benefit paid in the year.
Not surprisingly, many couples in this situation don’t bother to claim child benefit, reasoning that if they are going to have to pay it all back, there is no point in making a claim. While this is an understandable course of action, it is a very costly mistake to make.
Each year for which child benefit is claimed provides a qualifying year for a person for whom that year may not otherwise be a qualifying year. Even if a person has only one child, the number of qualifying years that may potentially be lost by a stay-at-home parent as a result of not claiming child benefit is 12. This is just over a third of the qualifying years needed to qualify for the full state pension.
Where a person has more than one child, the number of potential lost years is even higher. Recent figures from HMRC, reported in the Financial Times, reveals that over 200,000 parents may be in this situation and will have lost some or all of their state pension entitlement.
What is the solution?
Rather than not bothering to claim child benefit, parents affected by the HICBC should claim the benefit on form CH2.
If parents don’t want to receive the benefit in order to avoid having to pay it back in the form of the HICBC, they can opt to stop receiving it (by filling in an online form). If circumstances change, for example, the family income falls and the HICBC no longer applies, the parent can restart the child benefit payments, again by completing a different online form. The child benefit helpline can provide advice (0300 200 3100).
Claims for child benefit should be made as soon as possible, as the claim can only be backdated for three months. This is an instance where a little bit of paperwork can reap large rewards.