The end of the tax year is a date indelibly marked in most people's minds. But this year, it also coincides with the deadline for buying National Insurance (NI) contributions as far back as 2006.
These arrangements have been in place for six years – the ability for people to fill any gaps in their NI contributions record, and so boost their State Pension.
By way of a reminder, people in the UK require at least ten years of contributions in their NI record to qualify for any kind of new State Pension. And if they want to maximise their entitlement, they need to have a complete NI record of 35 years.
Martin Lewis – who has, it seems, woven himself into the fabric of our lives since the cost-of-living crisis started to bite – has suggested that many people run the risk of missing out on thousands of pounds if they don't pay for any missing contributions before 6 April 2023.
At Investment Quorum, we often find that our clients overlook their State Pension. But they shouldn't. When it comes to cash-modelling exercises as part of a client’s retirement plan, the State Pension represents a good, healthy, primary layer of some £10,000 of pension income that is index-linked to inflation… and to which they are entitled (well, at least for the time being and subject to meeting the Nation Insurance contribution requirements). Currently, the State Pension is worth £9627.80 per year. Typically, the amount increases annually by the highest of three measures: Average earnings, Inflation, as measured by the Consumer Prices Index (CPI), or 2.5% - commonly referred to as the triple lock. This will be increased by 10.1% for 2023-2024, in line with inflation. Not to be scoffed at!
Usually, you can only go back six years when you are compensating for any shortfalls in your NI record. And the deadline for doing so is 5 April each year. The process involves purchasing Voluntary Class 3 NI Contributions.
So normally, this would have meant that you had until 5 April 2023 to make up for any gaps going back as far as 2016. Then that gap or shortfall becomes permanent and runs the risk of affecting your State Pension entitlement.
This six-year rule was temporarily relaxed in 2014, making it possible to fill gaps for any year from 2006 onwards. The “new” State Pension was introduced in April 2016, so this relaxation has given people an extended period of time to assess whether they might be able to increase their entitlement under the new system.
In practice, only those covered by the new State Pension system are eligible. So that means anybody who reaches State Pension age after 5 April 2016.
So, if you were born after 5 April 1953 (or after 5 April 1951, if you are a man), you have until 5 April to make up for any gaps that you might have accumulated between 2006 and 2016.
Your record of NI contributions can be checked online here.
Needless to say, the younger you are, the easier it will be to make up for any shortfalls while you are still working.
Making up for any shortfalls now can be extremely beneficial in some cases.
By way of an example, it would cost £8242 to plug in the gaps resulting from 10 missing years. That would give you an extra £2750 per year, or £55,000 over 20 years of retirement (before inflation). That’s a net increase of £46,760. (£55,000 minus £8240).
Currently, Voluntary Class 3 contributions cost £15.85 per week – just over £800 per year. However, if you decide that you want to fill in gaps that have been created over the past two tax years, then you will only have to pay the cost that was applicable during those years. Contributions for gaps in the last tax year cost £15.40, and the year before that they were £15.30 per week. You are, of course, free to top up only part of a year’s contributions – and that is cheaper.
You can add up to £275 to your State Pension per year (pre-tax). So, after three years of higher payments, you’ve hit the breakeven point and you will most likely get back at least what you had paid for the Voluntary Class 3 Contributions. Essentially, if you live only three years beyond retirement age, it’s already worth your while.
By way of an example, a 66-year-old man will typically live for another 19 years. So, each £800-ish that he has paid would get him £5300 back (remember that it’s index-linked to inflation, so the actual figure would be more). And women’s life expectancy is typically longer in the UK, so they’d get even more back.
In certain circumstances, making up any shortfalls will not necessarily boost your State Pension.
You should contact the Future Pension Centre if you are below State Pension age to find out if there is anything to be gained by topping up your voluntary contributions. If you’ve already reached State Pension age, then contact the Pension Service.
You may also wish to raise it with us at your next review.
Worth bearing in mind is that in certain circumstances, you may be able to top up any missing years free of charge – particularly if any gaps were due to illness, raising children or periods of unemployment.
You may have gaps in your record if you are self-employed or if you spent any periods of time unemployed or working abroad. You can check your National Insurance record on the government website. It is also worth checking your State Pension forecast – this will tell you how much State Pension you can expect to get, when you will get it and what options you might have for increasing your payments.
Contact HMRC sooner rather than later if you think there are any mistakes on your record.
There are a few other ways to give your pension a boost that do not involve making Voluntary Class 3 contributions. You might be eligible for pension credit, for example. Pension credits can top up your payments if you are on a low income. And of course, you might not want to retire… in which case, you can defer your State Pension. If you enjoy what you do for a living and are healthy enough to continue working beyond State Pension age, this could boost what you receive in retirement.
