Mind the gap

Will you get a full state pension when you retire? One in three people over pension age does not. The reason is simple. They have not paid enough National Insurance contributions during their working life. Most of the people with reduced pensions are women. But nearly 400,000 men also have a pension of less than the full £77.45 a week due to an inadequate contribution record.

It is very easy to miss payments – time spent in education, periods of illness or unemployment where you did not claim benefits, years when you looked after children or other relatives, time abroad, periods you earned very low pay (currently less than £77 a week) will all be gaps in your contribution record. And many married women will have a gap for all the years they worked but paid the reduced rate contributions which earn them nothing.

Now is the ideal time to check your record – the Inland Revenue announced recently that some people would get a bit more time to make up contributions they had missed. The concession was granted after the Inland Revenue admitted that in 1998 bureaucrats stopped sending out letters warning people that they had missed payments. As a result, hundreds of thousands of people could have a gap in their record and not know about it.

Contributions
To get a full basic state pension you need to have paid contributions (or had them credited) for 44 years if you are a man or 39 years for a woman, although that will be extended to 44 years as the pension age for women rises to 65. That change will be phased in for women born on 6 April 1950 or later (see Saga Magazine, January 2003).

If you are under pension age, you can find out the state of your National Insurance record by asking for a retirement pension forecast on form BR19. You can download the form from www.thepensionervice.gov.uk or you can ask for one by calling 0845 3000 168 – you can even fill it in over the phone. Once you have got your forecast, it will tell you how many National Insurance contributions you have and how much pension you can expect. If you are set to get the full pension then there is no need to worry. But if you can expect a reduced pension it may be worth trying to fill the gaps.

Normally you have to make up contributions you have missed within six years. The present tax year is 2003/04 so you should be limited to making up contributions no further back than 1997/98. But in a notice slipped out in April, the Inland Revenue announced that you would be able to pay the contributions missed in 1996/97 or later right up to 5 April 2008. The reason for this concession is that in 1998 civil servants in the Department of Social Security decided that the new National Insurance computer system was under such strain that they would abandon the normal job of sending out reminders to people who had missed contributions. Each year four million reminders had been sent and 160,000 people paid extra contributions. So over the five years when the letters were not sent, 800,000 people may have missed the opportunity to fill the gaps in their record. Although this concession is useful, contribution gaps before April 1996 cannot be filled.

One group is in a worse position – married women who were paying the married woman's National Insurance Contributions cannot now pay contributions for the years they paid the reduced rate and for two whole tax years after they stopped paying it.

Contributions and credits
If you earn at least £89 a week then National Insurance contributions will be deducted from your pay by your employer. Self-employed people have to pay contributions if their income is at least £4095 in the year. If you earn less than £89 a week you do not have to pay contributions. But if you earn at least £77 you will get a contribution credited to you for that week. If you earn les than £77 a week no credits will be paid and you will have a gap in your record.

There are other circumstances when a contribution will be credited to your account. Men get credits for the year they reach 60 and the next four years. That rule will be extended to women as their pension age rises. You also get credits if you are registered as unemployed or claiming a benefit because you are too ill to work or care for someone who is.

Mothers and carers
If you did not pay National Insurance contributions because you were looking after a child or someone who was disabled then you may get help with the gaps. It is called Home Responsibilities Protection and is for people who claim child benefit for a child under 16 or look after someone who gets attendance allowance or disability living allowance care component at the highest or middle rate. You do not get contributions credited for these years; instead they are deducted from the numbers of years’ contributions you need to get a full pension. Home Responsibilities Protection only applies for years from 1978/79. So if you looked after a child before April 1978 it will not apply to those years. Nor will it help women who had the right to pay the reduced rate of National Insurance contributions – they are not entitled to Home Responsibilities Protection for those years.

The calculation
To see how much pension you will get you need two numbers – the length of your working life and the number of years’ contributions you have paid or that have been credited to you. Men have a working life of 49 years – from the year they reach 16 to the year they reach 64. Women have five years less as their pension age is currently 60 but that will rise to 49 as their pension age rises to 65 by 2020.

You can still get a full pension even if you have five years with no National Insurance contributions. So a man needs 44 years contributions and a woman, at the moment, 39 years. To work out the pension you will get, divide the number of years you have paid or been credited with National Insurance contributions by 44 (men) or 39 (women at the moment). For example, a man with 40 years’ contributions will get a pension worth 40/44 of a full pension. Fractions are rounded up so he will get 91% of the full pension - £70.48 instead of £77.45. If you have paid more than 44 or 39 years you do not get extra pension.

If you get Home Responsibilities Protection the calculation is slightly more complicated. Each year of Home Responsibilities Protection reduces your working life by one year. For example, a woman with 25 years contributions would normally get 25/39 or 65% of the full pension which is £50.34 a week. But if she spent ten years claiming child benefit for a child under 16 she can deduct those 10 years from the 39 years and so will get a pension of 25/29 or 87% of the full amount which is £67.39. So Home Responsibilities Protection is worth £17 a week to her.

If you have paid so few contributions that the pension you would get is less than 25%, then no pension is paid.

Is it worth it?
If you have a gap and expect a reduced pension it can still be tricky to work out if it is worth paying extra contributions to fill it. Some people should not consider paying extra contributions. If you are divorced or widowed – and not remarried – you can use the contributions of your husband or wife for any of the years you were married. So you only need consider paying more if you both had a year when contributions were missed. If you are a married woman then you can get a pension based on your husband’s contributions which is worth about 60% of the full basic pension. So it is normally only worth paying extra contributions if they will earn you a pension which is more than 60% of the full pension. It may also be worth paying contributions if you are either older than your husband or less than five years younger. You can get the pension that you have paid for from the age of 60, but you cannot get a pension on his contributions until he reaches 65.

National Insurance contributions cost between £5.95 a week and £6.95 a week depending when they were due so a whole year will cost between £309 and £361. Every year’s gap in your record reduces your pension by either either £80 or £120 a year. So filling a year’s gap takes between 2½ and 4½ years to pay for itself.

Some married women though get a much better deal. If they have paid contributions for less than ten years then their pension would be less than 25% and pensions that small are not paid. But if paying extra contributions for one or two years will bring them across that threshold then they go from having no pension to having a pension of around £20 a week. So in exchange for contributions of as little as £350 they may get a pension worth more than £1000 a year.

Even if you have a gap and even if filling it would boost your pension – beware. You may be entitled to extra money anyway through minimum income guarantee or the new pension credit that starts in October. That will bring your total income up to £102.10 a week if you are single or £155.80 if you are married. So if you have an income below these amounts, paying extra contributions will not normally give you any more money.

Further information
Your local Inland Revenue office will be able to help you or you can find out more from www.inlandrevenue.gov.uk

July 2003

e-mail Paul Lewis on paul@paullewis.co.uk