This piece first appeared in Saga Magazine in April 2009
The text here may not be identical to the published text

 

To pay or not to pay?

The temptations and pitfalls of filling gaps in your NI record

 Giving the Revenue £300 now could boost your state pension by £150 a year for life. It should be a no-brainer. But the Byzantine rules mean that only some can take advantage of this bargain. And some of those who can should not. Paul Lewis explains.

From 6 April more than three million people will be able to buy extra National Insurance contributions to make sure they get a full basic state pension. The people who will benefit from the change reach pension age between 6 April 2008 and 5 April 2015. So they are men born between 6 April 1943 and 5 April 1950 and women born between 6 April 1948 and 5 October 1952. The age range of the women is shorter because pension age for women is rising to 65 between April 2010 and April 2020. By 5 April 2015 that process will be half way through and the youngest woman to have reached pension age will be 62 years six months old.

The basic state pension is, at best, £95.25 a week. But to get this modest sum you have to jump through more hoops than a killer whale at Seaworld. The main hoop stops you getting even that amount if you have not paid enough National Insurance contributions. People have gaps in their record when they did not pay contributions. Some were too low paid, others at university or abroad, some just because they stayed at home. As a result barely one in three women and about nine out of ten men retire on a full pension.

Full pension
To get a full pension at the moment you need 44 years contributions if you are a man and 39 if you are a woman. But next year those rules change and anyone – man or woman – who reaches pension age from 6 April 2010 will only need 30 years contributions to get a full pension. The change applies to men born from 6 April 1945 – who reach pension age on 6 April 2010 – and women born from 6 April 1950 – who reach pension age on 6 May 2010.

That leaves a huge difference between those born before 6 April 1945 or 1950 and those born on that date or later. Imagine two twins one born at 23:55 on April 5th 1945 and the other born ten minutes later at 00:05 on 6th. Those boy twins reach 65 in 2010. The first will need 14 years more contributions to get a full pension than his brother. Suppose they each have just 30 years contributions. That will be enough to earn the younger twin a full pension of £95.25. But the older twin will only get 30/44ths of a full pension which is rounded up to £65.73 a week. That difference of nearly £30 a week will last for life. Things are not much better for women. Someone born before 6 April 1950 who has 30 years contributions will get 30/39ths of the full pension which is £73.35.  Her sister born later will get the full amount, about £20 a week more, for life.

Under current rules people can buy contributions for the past six years – and in many cases for the past twelve years. The problem is that gaps are often longer ago than that. So new rules start this April to allow people to buy six years of extra contributions right back to 1975/76. But this concession is only for people who reached pension age on 6 April 2008 or later.

Is it worth it?
From April 2009 the cost of these voluntary National Insurance contributions is going up by nearly 50%, from £8.10 a week (£421.20 a year) to £12.05 (£626.60 a year). The government says that is because the contributions will be more valuable from April 2010 when you only need 30 years rather than 39 or 44 years. So each year’s contribution is worth more. But that is not true for people who reach pension age before 6 April 2010 will only get the lower boost to their pension but will be paying the higher rate for their contributions.

Moreover, because of the way the arithmetic works each year’s contribution currently boosts the pension by either 2% or 3%. For those who reach pension age from April 2010 each year’s contribution will boost the pension by either 3% or 4%. So it is possible that the higher rate of contribution will still buy the same 3% increase in pension.

Some contributions will cost less than £12.05. Men born before 24 October 1939 and women born before 24 October 1944 can still buy the years back to 1996/97 as long as they do so before 6 April 2010. Those six years are charged at a special rate between £309 and £351 for each year bought. In addition contributions for the previous two years are always charged at their original rate which is £8.10 for 2008/09 and £7.80 for 2007/08 and, if you buy them before 6 April, contributions for 2006/07 will be £7.55 a week.

But at any price contributions are good value. Each year boosts the pension by £100 or £150 a year (those who reach pension age before 6 April 2010) and by £150 or £200 a year for others. So the pay back period ranges from two to six years.

Who can’t buy them?
Married women who paid the reduced rate National Insurance contributions while they worked cannot buy extra years for any year they paid these contributions and for two whole tax years after they stopped paying them. Women who leave work to look after children are given what is called Home Responsibilities Protection (HRP) for the years they get child benefit. HRP can boost their pension. But if they were paying married woman’s contributions, HRP does not begin until two whole tax years have passed after they stopped work.

HRP is being scrapped for women born on 6 April 1950 or later. Instead they will be given a National Insurance credit for any week they received Child Benefit. But there will still be excluded periods after years when they paid the married woman’s contribution.

The rules for buying the contributions back to 1975/76 exclude people who do not already have at least 20 years contributions (including any years of home responsibilities protection). They are not excluded from buying the past six years contributions.

Who shouldn’t buy them?
It is only worth buying contributions if your pension is going to be less than 100% and you should make sure you only buy the contributions needed to take it up to 100%. If you buy too many contributions refunds are hard to get. Widows will normally have 100% pension on their late husband’s contributions.

Married women can get a pension on their husband’s contributions which is equivalent to about 60% of a full pension. So there is no point in buying extra contributions unless that will boost the pension to more than this amount. A woman who reaches pension age before 6 April 2010 needs to have 24 years contributions to get a bigger pension on her own contributions than on her husband’s. Younger women will get more with 19 years of their own contributions. Divorced people can use their ex-partner’s contributions so they need to make sure that is done before considering buying extra.

If you or your partner claim pension credit there may no advantage in boosting your state pension. Pension credit is means tested benefit which tops up your income to £130 a week if you are single and to £198 a week between if you are a couple. Every pound in extra basic state pension you buy will simply reduce your pension credit by the same amount.

Mistakes

Officials at HM Revenue & Customs and the Department for Work and Pensions frequently get these complex rules wrong. Always question a decision you do not like and insist on getting an answer in writing.

Further information

About the new rules that start from April 2009: www.thepensionservice.gov.uk/state-pension/basic/faqs.asp

About the other rules on paying voluntary contributions www.hmrc.gov.uk/nic/class3.htm

Pension age calculator www.thepensionservice.gov.uk/state-pension/age-calculator.asp  

 

April 2009

 


All material on these pages is © Paul Lewis 2009