End of Line Sale!
May 3rd, 2009
The State Pension is an important part of your final retirement benefits and from 6th April 2010 the required number of qualifying national insurance (NI) contribution years to obtain the maximum pension is being reduced to 30 years. If you do not have 30 qualifying years by the time you reach State Pension age then you will receive 1/30th for every qualifying year with 1 being the minimum. If you reach State Pension age prior to this date then the qualifying criteria is more restrictive.
There are various reasons for gaps in contribution history and The Pension Service is actively writing to those it may affect, who have missed years from 1996. This letter should not be ignored.
But why is this year so important?
First the end of the extension – if you missed, for example, the 1999/2000 tax year then you could only have made good the shortfall by paying voluntary contributions in the years up to 5th April 2005, but an extension was put in place increasing the normal 6 year window of opportunity to include tax years as far back as 1996/97. This extension ends for some on 5th April 2009. It must be remembered that you can only buy back the actual year you missed (although this is due to change from 6th April 2009 where you can buy up to six non-related additional years).
Second the cost of buying back added years is set to increase dramatically by 45% from 6th April 2009 to £620 per year (although still potentially a bargain). Although from 6th April 2009 there will be fewer restrictions on the years’ you can buy and when they can be bought.
So what is the cost benefit?
Take a female due to reach State Pension age in 2010/11 with only 29 years, the year missed is 2006/2007 and the cost of buying this year is £392.60. This will provide 1/30 of £95 (approximately based on the State pension for 2009/10) as additional pension or £3.17 per week / £164.84 per annum (increasing thereafter). To buy this level of income in the pensions market would require a fund of over £5,000 not a bad deal!
But I am due to retire before 6th April 2010 what can I do?
You can still buy back missing years if it proves profitable, but unlike after 2010 you need to have a minimum of 10/11 years to gain any entitlement in your own name.
What are the pitfalls?
Care does need to be taken as certain years cannot be bought back, for example, the years in which a woman has paid reduced NI contributions.
Also married couples/civil partners with insufficient NI contributions will be entitled to a reduced basic State Pension of up to 60% of their partner’s entitlement based on his/her NICs. This is payable when they have both reached state retirement age, so there may be no point in buying additional years – although be wary of divorce!
The above are just some of the complications with the State pension further information is available on The Pension Service website and a state pension projection can also be obtained from this website. Remember you can have years credited for time whilst unemployed or caring for children, as well as many other reasons.
State benefits are an important part of any retirement planning and careful understanding of what is available as well as the use of self funding is essential to ensure you retire on sufficient monies for you to enjoy your retirement.