July 20, 2023

Act smart! Maximise your State Pension

The State Pension is an important part of your overall Financial Plan, forming the foundation on which other retirement savings and income streams can be built.

You might know that the amount you’ll receive is based on your National Insurance record, which takes into account the number of qualifying years of contributions made by you.  However, some people might find that they have gaps in their contribution record, which can impact their State Pension entitlement.

Career breaks and maternity leave are often the most common reasons for any shortfall (and as a result, a higher proportion of women are likely to have gaps). Self-employed people who didn’t always pay contributions because of small profits, and people who’ve worked abroad for a time, might also be affected.

There’s good news, however, because it’s possible to make voluntary National Insurance Contributions (NICs), which means gaps can be filled and your State Pension entitlement is bolstered to its full potential.

Let’s take a closer look

To receive the full State Pension (currently more than £8,000 a year), you generally need 35 years of qualifying NICs. You can start by checking your National Insurance record to find out if you have any gaps, if you’re eligible to pay voluntary NICs, and if so, what the cost might be.

If you’ve already made up 35 qualifying NI years, there’s no additional benefit to buying any more – the full State Pension payment will stay the same. The same applies for the other end of the scale. A minimum of 10 qualifying years is required to receive any State Pension benefits at all, and so if your voluntary contributions are not going to bring you up to 10 qualifying years of NIC, it might not be worthwhile making additional payments.

But, for others, there is a definite advantage.

In particular, men born after 5 April 1951 and women born after 5 April 1953 should look at whether they could benefit from topping up their contributions. (If you were born earlier than this, you’ll be on a previous version of the State Pension, which doesn’t apply.)

MoneySavingExpert recently reported that some people are due to make over £50,000 in boosts to their State Pension by buying contributing additional NICs!

The deadline

Normally it is possible to replenish amounts missed for the previous six years, but when the ‘new’ State Pension was introduced, there was a new arrangement put in place to enable gaps to be plugged as far back as 2006.

The original deadline for such contributions was due to end on 5 April 2023, but an extension was granted to 31 July 2023.

However, due to demand, the government has extended the date again to 5 April 2025.

In addition to the extensions, the cost of paying voluntary NICs is to remain static until then. After this date, the rates may go up, or you may be inelligible to pay, so it’s a good idea to keep this deadline in mind.

How much does it cost?

The cost of plugging the gap will depend on the type of NIC you pay. To give you a brief overview:

  • Class 1 contributions are paid by employers and their employees
  • Class 2 contributions are fixed weekly amounts paid by self-employed people
  • Class 3 contributions are voluntary NICs paid by people wanting to fill gaps in their contributions record

The rates for the 2023 / 2024 tax year are:

  • £3.45 a week for Class 2
  • £17.45 a week for Class 3

The current rate is usually payable when making a voluntary contribution. However, if you’re a man born after 5 April 1951 or a woman born after 5 April 1953, you’ll pay the rates for the 2022 / 2023 tax year:

  • £3.15 a week for Class 2
  • £15.85 a week for Class 3

What to consider

Before deciding to make voluntary NICs, it is crucial to assess your personal circumstances and eligibility criteria. The rules surrounding them can be complex, and factors such as age, employment status, and recent contributions should be taken into account.

The questions to ask are:

  • Are your NI payments up-to-date?
  • Will making additional contributions make a significant difference to your final pension payments?
  • If not, are there other avenues to consider that will help offset the gaps in your State Pension, such as increasing your payments into your Private Pension Plan?

We can, of course, point you in the right direction by providing clarity and guidance.

In addition, you can take a look at our State Pension video, which explains everything you need to know about the State Pension, including how it’s calculated and where to go to get a personal forecast.

Of course, depending on the level of shortfall, making up these payments will not make financial sense for everyone, and you may be better to invest elsewhere instead.

Please speak to us first about finding the best options.

We’re always here to help.

July 20, 2023