Kneeding is very normal and I melt every time any of my cats do that with me. I would love to have them do it reguarly - its a very special feeling to know your cats are happy and content and come to you to show it.

Pouncer used to wake me up every morning while kneeding me. Sigh... what I wouldn't give to be woken up like that anymore.

All my cats have their claws and never use them while kneeding -- its not practical for them to do so. As kittens they kneed to produce milk from their mother. If the needled her with their claws, she'd jump back and they'd never get milk. Sometimes they might accidentally claw you, but then you know you need to trim their nails.

If you want to perhaps move your kitty to a less sensitive location, try encouraging them to use your leg or tummy while you are under a thick blanket. Or give them a nice big stuffed animal to be happy with. One of my cats loves to kneed big blankets. He goes nuts.