In this month’s Focus we are taking the opportunity to … err … Focus … on why you should check your National Insurance Contribution situation and State Pension entitlement and, if eligible, consider topping up your NICs. We also suggest you do this before next April. First because you can usually only go back six tax years and may not want to lose a year’s potential extra pension benefit that is payable for life and, second, because the annual rate to buy contributions may go up in the next tax year.
The cost benefit looks attractive: e.g. a person has a three-year NI contribution gap and, to fill that gap, purchases contributions at the current rate of £780 to fill a gap of a full year – total cost £2,340. Each year of voluntary contributions purchases 1/35 of a state pension, so up to about an additional £250 per year for life – so up to about £750 per year for life if filling a three-year gap. This person would recover their outlay in just over three years, and then has an extra £750 a year for life. And that extra pension will escalate together with their other State Pension.
But is this right for you? Here are some key steps to take before making any decisions:
1) Determine which State Pension Scheme you come under. It depends on your date of birth.
The Old System is for men born before 6 April 1951 and for women born before 6 April 1953.
The New System is for men born on or after 6 April 1951 and for women born on or after 6 April 1953.
2) Check if you do have a full entitlement or if there are any gaps. One method is to go to the government website at www.gov.uk/check-national-insurance-record. Also,
For members of the Old System, contact the Pension Service on 0800 731 0469 to ask for details of your National Insurance Record and to establish if you have any gaps that you can make up this year.
For members of the New Scheme, go to www.tax.service.gov.uk/check-your-state-pension to check your position – you will be guided through the process. You can also contact the Pension Service on 0800 731 0175.
3) If you have gaps in your contribution record (regardless of which scheme you are entitled to) you can normally make voluntary NI contributions to fill some or all of the gaps. However, you can’t fill a gap if, in the year in question, you were over State Pension age at any point or eligible to pay the special reduced ‘married woman’s rate’ of National Insurance for that year, or exempt from paying NI as a self-employed person because you held a low earnings exception certificate (however, you may be able to pay voluntary Class 2 NICs – the special category of NI for the self-employed.
4) Work out how much each year will cost – the cost is different for each qualifying year you are trying to cover.
Currently, those with a full state pension entitlement will receive around £168.60 per week. This means that each additional year you plug is worth around £4.80 per week, equivalent to about £250 per year for the rest of your life.
Things to bear in mind:
1) Do you receive any state benefits? If you receive any means-tested benefits such as Pension Credit or housing benefit, topping up your pension might not be a good idea. You may find you pay voluntary NICs to boost your State Pension but end up little or no better off because your higher pension means your entitlement to other benefits is reduced.
2) Check your ‘Personal Maximum’ Just because you can fill gaps in your record, it doesn’t necessarily mean you should. Check your ‘Personal Maximum’ figure on the ‘Check your State Pension’ website at www.gov.uk/check-state-pension. If your Personal Maximum is greater than or equal to the full flat rate, it may be that you’ll get a full State Pension without needing to pay any voluntary contributions.
3) If you are divorced or have been bereaved your State Pension entitlement may be based wholly or partly on the NICs of your ex- or your late spouse. But the basic principle is the same – if there are gaps, you should be able to fill them.
4) How long are you likely to receive a State Pension? It is important to consider your personal lifestyle and any health issues you might have or foresee, as you might not live long enough to reap the benefit of extra contributions if you are in poor health.
5) Do I need to do it now? If you are under State Pension age, paying voluntary NICs will be of no immediate benefit to you. Provided that you do not miss the deadline to pay voluntary NICs for a particular year, and provided that the Government does not change the rules or the deadlines, it may be worth holding on to your money and making up missing years at the last moment possible.
The rules for topping up your State Pension are complicated and the above notes highlight only some of the key points. But if none of the above caveats apply, then we recommend that you check your State Pension entitlement sooner rather than later, possibly to avoid losing a year’s and because costs may go up next April.
NB The notes above are necessarily brief and only cover some of the main points. If you think any of the above may apply to you, we recommend that you take timely advice from an appropriate professional adviser.
And remember, do not hesitate to contact us to discuss your financial planning needs. Reviews are part of our added-value service for our existing clients – we are here to help.
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