State Pension changes
The Government State Pension provides a regular income to those individuals who have reached state pension age. This may be between 66 and 68, depending on your current age. You can check your age of access and the state pension entitlement on the government website: https://www.gov.uk/check-state-pension.
If you are entitled to the Government State Pension, the amount you receive will depend on having paid sufficient qualifying National Insurance (NI) contributions or receiving equivalent NI credits. At state pension age, you can claim the State Pension if you have a minimum of 10 years NI contributions and are:
- A man born on or after 6 April 1951
- A woman born on or after 6 April 1953
To obtain the maximum amount, which is currently £185.15 a week, a minimum of 35 years of qualifying NI contributions is required.
What if you do not have the 35 qualifying years?
Firstly, check whether you can plug any yearly NI gaps in your record for free…
In the list below, you would have been entitled to NI credits but may not have received them. If this is applicable, you can manually apply for these NI credits for each missing year.
- Statutory sick pay: You are/were on it and not earning enough for a qualifying year.
- Jobseeker's allowance: You are/were eligible for it but not claiming it.
- Employment and support allowance: You are/were eligible for it but not claiming it.
- Caring for a family member: As long as you are/were between 16 and state pension age and the family member is/was under 12 and not your child. Also known as 'grandparent credits'.
- Caring for a sick/disabled person: As long as it is/was for at least 20 hours a week.
- On jury service: You are/were on it and aren't/weren't self-employed.
- Wrongly imprisoned: As long as your conviction has since been quashed.
- A foster carer (or kinship carer in Scotland): As long as it's been since 6 April 2010.
- On statutory maternity, paternity or adoption pay: You are/were on it and didn't/won't earn enough for a qualifying NI year (additional statutory paternity pay also counts).
- Spouse of a member of the armed forces: You're married to, or a civil partner of, a member of the armed forces and went with them on an overseas posting (additional eligibility rules apply here).
- On a Government-approved training course: You are/were on one, are over 18, and weren't sent on the course by Jobcentre Plus.
If you do not have the maximum qualifying years for the full State Pension, you can make payments to the UK government to plug gaps in your NI record. Currently, the years for which you can fill gaps go back to 2006; however, this arrangement ends on 5 April 2023. Thereafter you can only go back six tax years.
Only full NI years count towards your State Pension, so if there are years where you worked, but did not earn over the trigger threshold of £6,396 a year, you will need to pay to upgrade them to full years for them to show on your NI record. This is cheaper than buying full years, though, so it can be a cost-effective way of boosting your State Pension.
What to consider before 5th April 2023:
Until 5th April 2023, you can buy national insurance (NI) years to fill gaps going back to 2006. From 6th April 2023, the number of extra years you can purchase drops down to the last six tax years, so checking now is important.
- For those at or near State Pension age topping up may be a more straightforward decision. If your State Pension is, or is forecast to be, less than £185.15 a week, and you are unable to plug gaps by any other means, topping up could be an excellent way to provide index-linked and guaranteed income to support you in retirement.
- If you're younger, there are a few other things to consider. The younger you are, the more time you have to earn the maximum years through work or NI credits. This would mean that it is more of a risk to buy additional years unless you are sure you will not make up for them later (i.e. moving overseas).
What you must consider is that should you purchase the additional years and you die, or legislation changes, you may not get back the value of your purchase.
Is it worth it?
Buying a full national insurance (NI) year costs £824, unless:
- You are topping up the two most recent tax years (where it is about £20 to £30 cheaper).
- You are self-employed.
- You are topping up a partial year, in which case it will cost less to make it a full year.
A purchased additional NI year usually adds up to £275 per year to your pre-tax State Pension. This means that should you live at least three years beyond your State Pension age, you would benefit. You cannot pay to increase your State Pension beyond the maximum amount of £185.15 a week.
How long are you likely to live?
To establish whether you are likely to live three years beyond your State Pension age, you need to consider, among other things, your health and life expectancy. Based on the Office of National Statistics (ONS), the below tables show how many more years people in different age groups can expect to live on average.
Below is the likelihood of living at least three years past one’s State Pension age, as the breakeven point for voluntary contributions. For example, 95% of men who are currently aged 65 will live long enough to claim State Pension for three years or more.
Other considerations of purchasing additional State Pension years:
It could be very helpful to speak to the Government’s Future Pension Centre on 0800 731 0175, who can provide a quote for the cost of purchasing voluntary years. Such a decision may have an impact on your wider finances, so it is important to consider the following:
- If you are likely to have a low income and only rely on State Pension, pension credit may cover the gap. Pension credit is extra money for people at State Pension age, who do not have a certain basic level of income. That top-up can include topping you up to roughly the equivalent of what you get in the full State Pension. So if you have no other savings or assets and are likely to be only relying on your State Pension or a little more, there is a risk that by paying to top up now, you could have got the same with pension credit. There is however no guarantee that the pension credit rules and eligibility will not change.
- The gains from buying extra years may be reduced if it pushes you into a higher or additional rate tax bracket. If you are going to be near the threshold of either paying tax or hitting the 40% tax (or even 45% tax) bracket once your State Pension and other income are combined, you will pay (more) tax on your pension income if that income increases.
This will mean it will take longer for you to break even on any voluntary NI contributions you make, although it is likely to remain a worthwhile purchase based on the above analysis.
Please note that the above does not constitute as personalised advice. To book a meeting to discuss this and wider financial planning, please use the below link: