Child benefit changes could destroy your state pension

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If you are a full-time parent, the new rules surrounding child benefit could mean you miss out on a huge chunk of your state pension. And that's not all: if you have anything other than a traditional nuclear family, you could face some nasty surprises too.

So what are the risks, and what can you do about them?

Pension hit

NFU Mutual has highlighted that when the rules surrounding Child Benefit change in January 2013, the law of unintended consequences could mean that hundreds of thousands of people face significant problems.

The government already accepts that 1.2 million people will lose some or all of their benefit through a tax charge, but that's just the start of it. Sean McCann, personal finance specialist for the Mutual, warns that there could a dramatic impact on your state pension too.

The problem would arise if the family decided not to receive child benefit at all - as it will only be clawed back in tax anyway. However, where one of them is a full-time parent, this would have a knock-on effect on their State Pension.

McCann says: "This is because for each week the stay-at-home parent is entitled to Child Benefit, they qualify for a National Insurance credit, which contributes towards their basic state pension entitlement, up until the youngest child is aged 12. If they have another child and do not re-register for child benefit then they will lose out."

The solution is to keep claiming the benefit, and then paying it back in tax. It may seem long-winded and a bit of an admin burden, but is essential if you are to retain full state pension rights.

Modern families

McCann says the problems don't just stop here. Modern family life is not always straightforward: you don't always get couples staying together, and new relationships can be complex. If a new boyfriend or girlfriend moves in, you will need to consider how the rules affect you.

They will then become your 'partner' in the eyes of the HMRC, which will bring them into the rules. If your partner earns above the threshold, they will suddenly get a huge tax bill. As McCann points out: "For instance, if a person with an annual income of £60,000 or more were to move in with someone with three children then they could be landed with a tax bill of £2,449.20."

Finally, he points out that where both partners work, they will have to be very open about their financial situation. McCann says: "The truth is that many couples don't share information about their income and finances, yet this co-operation is essential to the success of the new measures. For instance, if each partner has an income of over £50K, then the one with the higher income will be required to pay additional tax to repay Child Benefit."

So what can you do about it?

There are some legal ways for people who are above the threshold to bring themselves back under it, and avoid all these problems.

McCann points out that your first step might be to make a pension contribution He says: "If your income after pension contributions is less than £50,000, there is no charge. Salary sacrifice is an even more tax efficient way of doing this."

Alternatively you can share some of your taxable income with your spouse - such as moving income-producing assets into the name of your other half. You should also make sure you use your ISA allowances, because income from ISAs is not considered to be taxable income.

And finally, he suggests: "Make your life partner a business partner. If you own a business, you may be able to employ your partner, or bring them into a partnership to spread income around the family."

Budget winners and losers
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Child benefit changes could destroy your state pension

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The much-debated cut to child benefit was confirmed, albeit through a less direct hit than was outlined in the pre-Budget report. The benefit will be removed gradually for those earning more than £50,000 – reducing by 1% for every £100 earned over the threshold, cutting off completely at the £60,00 mark. The Chancellor had planned to axe it where one parent earned over £43,000.

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