Child-benefit pensions trap affects 200,000

Weirdly dressed mother and child © iStockphotos

A loophole meaning parents miss out on the full state pension because of changes to the child-benefit rules could hit more than 200,000 people, says HMRC – far more than previously estimated. The technicality potentially affects couples where one partner commands a higher salary while the other doesn’t earn enough to pay national insurance contributions (NICs), perhaps because they’re staying at home to look after children.

Usually, the non-working partner would qualify for national insurance credits, helping to ensure their national insurance record is sufficient to qualify them for a full state pension. However, where the higher earner is the one claiming the child benefit, the credits are never paid to their spouse, as the scheme is administered through the child-benefit system.

With savers needing 35 years of NICs to qualify for a full state pension, the problem means many people will miss out in retirement.

And while couples have the option of moving the child-benefit registration to the non-working partner to close the loophole, the change can only be backdated by three months. Affected families are missing out around £4,900 per family over the course of a 20-year retirement, estimates pension provider Royal London. MPs on the Treasury Select Committee have urged ministers to take action to protect couples caught out, and to change the rules so more people don’t fall into the trap.