Will you get a full State Pension?
September 30th, 2012
There are millions of people in the UK – especially women, part-time workers and those who have worked abroad – who have patchy national insurance (NI) contribution records, but under the current rules anyone reaching state pension age (SPA) after 5 April 2010 will only receive the full basic state pension (£107.45 a week in 2012/13) if they have paid, or been credited, with NI contributions for 30 years or more. Anyone with less then 30 qualifying years will have their basic state pension proportionately reduced.
It is, however, possible to make voluntary NI contributions to ‘plug’ gaps in your record, although this may not be appropriate for all individuals. The following should be considered when weighing up if such contributions are worthwhile making:-
• Find out your expected entitlement by completing a BR19 form. If you have 30 qualifying years then there will no need to make voluntary contributions.
• Are there any periods for which you may have been treated as though you had been making contributions? These include periods covered by Home Responsibilities Protection (HRP), and when you may have received other benefits such as Carer’s Allowance, Jobseeker’s Allowance, Incapacity Benefit or Employment and Support Allowance.
• What is the total number of qualifying years you can possibly obtain? – if you are married you can receive a state pension of up to 60% of the full basic state pension based on your partners NI record and you may be no better off from making voluntary contributions
• Would you be eligible for pension/savings credit, housing benefit or council tax benefit? These are means tested and based on the income and capital you hold. Again, if you will be eligible then any increase in your state pension will reduce these entitlements.
• Is the shortfall due to periods when you elected for the married woman’s reduced NI rate? If so, these years cannot be reinstated.
• Is your state retirement age beyond 5 April 2015? If so, you can only pay voluntary contributions to cover gaps in the preceding six years
But if you do have a shortfall, is the cost of buying the additional credit worth it?
Does your state pension age fall between 6 April 2008 and 5 April 2015?
Voluntary class 3 contributions can usually only be paid for up to six years after the tax year to which they relate. In 2012/13, this means the 2006/07 tax year, or later.
The rate you will pay is dependent upon your circumstances and will either be the current rate that applies in the year that you actually make the payment, or the (lower) rate that applied in the year that you are making the payment for.
Assuming the latter, the cost of purchasing a full years credit for 2006/07 would be £392.60 (the weekly rate of £7.55 for 2006/07 x 52 weeks). One year’s entitlement of the State pension is currently worth 1/30th of £107.45 per week (or £3.58), which annualised is £186.16 (£3.58 x 52 weeks).
However, if you attained state pension age today and wanted to buy a gross pension income of £186.16 pa you would require a fund value of £4,967.45* if your were male (aged 65) and £6,016.09* if female (aged 62 and 2 months) – not a bad return on £392.60!
*this is the assumed cost of purchasing a single life pension annuity paid monthly in advance, with no guarantees but increasing in line with RPI based on the best annuity rate available from the www.moneyadviceservice.org.uk annuity comparison system as at 31 July 2012. This is not an exact replication of the state pension and is for illustrative purposes only.
However, for those retiring before 5 April 2015, you may also have the option to purchase up to an extra 6 years to cover gaps in your NI record from 1975/76 onwards. In 2012/13, the cost for buying these extra years is set at a fixed rate of £13.25 per week (or £689.00 for a complete year) – although it is important to note that you must already have at least 20 qualifying years and if your state pension age was before 6 April 2010, one of the 20 years must have been on a paid contribution basis.
Should I buy additional qualifying years?
Whilst the above outlines some of the key considerations it may not make sense for everyone with gaps in their NI record to make voluntary contributions – Your decision may also be affected by your life expectancy, the date you and (where appropriate) your spouse or civil partner will reach state pension age and – importantly – what the eligibility criteria for the proposed new ‘flat rate’ state pension will be. The last point is particularly pertinent for those who will reach state retirement age after 2015 which is the earliest anticipated date that the flat rate pension is likely to be introduced.
In addition, as mentioned earlier, individuals reaching state retirement age with little or no savings or private pension provision currently benefit from the pension guarantee credit which ensures a minimum weekly income of £142.70 (or £217.90 if you have a partner), regardless of NI contribution history.
Before choosing to make any voluntary contributions, it is important to consider your own circumstances carefully, and seek advice where appropriate, especially as there is no automatic right to a refund if, after paying, you decide you have made the wrong choice