A window of opportunity for people to boost the amount they receive from their state pension in some cases by tens of thousands of pounds over the course of their retirement is about to come to an end.
To qualify for the full new state pension currently £185.15 per week, (rising to £203.85 in April) 35 qualifying years are normally required. This can be achieved either by paying National Insurance Contributions (NICs), by receiving NI credits, or a mixture of both. A qualifying year is one in which you have paid or been credited with paying NICs on earnings that are at least 52 times the lower earnings limit, currently £123 a week.
If this level of NICs is not made in a particular tax year, the year in question doesn’t count as a qualifying year for your state pension and you will not be entitled to the full amount. For example, if you have 20 qualifying years, you will only be entitled to 20/35 of the “new” full state pension i.e. £105.80.
Under normal rules, you have six years from the end of the year in question to fill any gaps by making voluntary NICs payments thereby boosting your pension. For example, you have until 5 April 2024 to plug gaps in the 2017-2018 tax year.
However, under transitional arrangements that came in when the new state pension was introduced in April 2016, some people have had the opportunity to backdate payments going back as far as 2006/2007.
Men born after April 5, 1951 and women born after April 5, 1953, who wish to plug a gap in their NI record are currently allowed to go back as far as 2006/2007 to plug any gap. This is ten years more than under the normal rules.
Under these arrangements, a person with gaps in their NI record in each of the 10 tax years between 2006/07 and 2015/16 could by making a one-off lump-sum payment of £8,242 see their annual new state pension boosted by £27,500 over the first ten years of their retirement. This is equivalent to a return on their ‘investment’ of 234%. If they were to receive the state pension for 20 years, they would benefit to the tune of an additional £55,000 – equivalent to a pre-tax return on their ‘investment’ of 567%.
If that’s an attractive proposition, and you think you might qualify you need to move fast. The deadline is 5 April after which the normal rules will apply and you’ll only be able to backdate payments going back six years.
The above calculations are based on a person voluntarily paying £15.85 in Class 3 NICs each missing week in their National Insurance Contributions record. Over the course of a full year, this equates to £824.20. This has the effect of boosting their state pension by £275 a year (before tax), or 1/35 of the full state pension. In effect, it takes just three years of retirement before the financial breakeven point is passed, after which it becomes ‘profitable’ to plug the gap – this assumes no tax is paid on the pension.
Reasons for NI record gaps
There are many reasons why a person’s National Insurance record night be incomplete. Some of the most common are; they were employed but had low earnings; they were unemployed but not claiming benefits; they lived or worked outside the UK; they were self-employed but because of low profits did not pay NICs.
People who’ve already reached state pension age, currently 66 for men and women and rising to 67 by 2028 can continue to pay class 3 voluntary contributions. However, those people who have yet to reach state pension age may have a choice of paying either class 2 or class 3. The big advantage of class 2 over class 3 is that it costs less – £3.15 a week versus £15.85. More details of who is eligible to pay the two types of voluntary contributions are available . Please note that the cost of weekly contributions could change.
To qualify for the full new state pension, currently £185.15 per week, 35 qualifying years are normally required. However, this is not always the case. If you were contracted out of the additional state pension, part of the pre-April 2016 pension system, you will need more than 35 qualifying years. From April 6, 2016, you need a minimum of 10 qualifying years, which can include contributions paid before that date to receive any state pension.
Check your pension entitlement
Before paying any voluntary contributions, it’s vital you know about your current state pension entitlement. If you’ve already qualified for the full state pension, then paying voluntary class 3 or class 2 contributions won’t increase it. In addition, even if there are gaps in your NI record you may still have the 35 qualifying years necessary for the full state pension, in which case paying voluntary contributions would be pouring money down the drain.
Paying voluntary class 3 contributions is also less likely to appeal to younger people, who will naturally plug any gaps during the remainder of their working lives. And if someone is in poor health making the initial financial outlay may not make financial sense. On account of their greater life expectancy than men’s of nearly four years, women are also more likely to benefit.
How to obtain a pension forecast
To find out how much state pension you can expect to receive, contact the Future Pension Centre, (Tel: 0800 731 0175), or use the government’s state pension forecast calculator. For the latter you will need to sign up to the Government Gateway.
If the forecast comes back at less than the full state pension of £185.15 per week, the next step is to check your NI record. This will give you details of any years in which your contributions are ‘incomplete’, tell you if you’re eligible to pay voluntary contributions and how much it will cost. Gov.uk explains the various way to make payment.
Other ways to fill NI record gaps
Working is not the only way to build up a NI record. In many situations, National Insurance credits are awarded automatically, for example, where a person receives Maternity Allowance. As long as neither parent is earning more than £50,000, NI credits are automatically received when they claim child benefit for children under the age of 12.
You can also increase the number of qualifying years by applying for NI credits manually, for example, to cover the period you were caring for a family, or a sick or disabled person, or on statutory sick pay but not earning enough to build up a full qualifying year. Unlike paying Class 3 voluntary contributions, plugging gaps in this way won’t cost you any money. More information is available on Gov.uk.
If you aren’t able to boost your state pension by increasing the number of qualifying years, or you choose not to do so, an alternative way of enhancing your state pension could be to delay taking it. We covered this in an article last year.
When it comes to money, a good rule of thumb is ‘if something looks too good to be true then it probably is.’ This could be one of the few occasions when this isn’t necessarily true. At the very least, if you reached the qualifying age for the new state pension after 5 April 2016, or are on course to do so, it might well be worthwhile checking see whether you might benefit.