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Thousands of families making this child benefit mistake

John Fitzsimons
Written By:
John Fitzsimons

Hundreds of thousands of families are at risk of a poorer retirement because of the way they receive child benefit.

That’s according to new analysis by pensions consultancy LCP, which has found that because the ‘wrong’ partner receives the benefit, they could be missing out on hundreds of pounds a week once they reach their later years.

Who gets the child benefit?

The current rules stipulate that anyone who receives child benefit for a child under 12 is treated as if they had also paid National Insurance contributions for that week. Importantly this credit only goes to the person who claims that benefit though.

This is crucial because there are some families where one partner is not in paid work, or on a very low wage, and who would get a boost from that National Insurance credit.

However, if the child benefit is being received by the higher earning partner, then this credit is effectively going to waste.

What will it cost me?

In order to receive the full state pension, you will need to build up 35 years of National Insurance contributions. Missing a year of contributions means you will lose one 1/35 of the state pension, which works out at £5 per week.

That might not sound a huge amount, but it can quickly add up. That’s £260 per year, or £5,200 over a 20-year retirement.

It’s worth remembering that not everyone who misses out on a child benefit credit will automatically suffer a smaller state pension too. They may still work for 35 years even outside of a low-earning year or two after having children, meaning they qualify for the full payment.

However, the LCP analysis suggests there are a whopping 200,000 families where the ‘wrong’ partner is receiving the child benefit, potentially putting the other partner at risk of a substantially reduced state pension.

Steve Webb, partner at LCP and former pensions minister, said that many couples may have no idea that having the child benefit in the name of the higher earner could end up costing them dearly.

He continued: “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.”

Can I rely on the state pension?

The state pension is a vital component of retirement planning for many of us, but it may not be enough for a comfortable retirement on its own.

A study last year found that even with this year’s 2.5% increase, the typical income remains £1,000 a year below the minimum income standard, while large numbers of us overestimate just much we will receive through the state pension.