If you have any gaps in your National Insurance record, now is a very good time to plug them. The more complete your NI record, the more state pension you are entitled to.
The generous Government scheme which allows people to fill historic gaps in their NI record will come to an end in April 2023, so you may want to apply before the deadline.
Under normal rules, it is only possible to fill gaps in your NI record up to six years after the year in question. After that point, the year becomes a permanent gap in your NI record and could affect your ability to build up a full state pension. This means that 2016/17 would normally be the oldest year which could be filled in 2022/23.
However, for a limited period – until 5th April 2023 – people are able to go much further back and fill gaps for any year from 2006/07 onwards – an extra ten years. This concession applies only to those who come under the new state pension system, namely those who reached (or will reach) state pension age after 5th April 2016.
The financial case for topping up
In some cases, buying back missing years can be extremely valuable. The current cost of voluntary Class 3 NI contributions is £15.85 per week or £824.20 per year. This one-off lump sum payment can add up to 1/35 of the full rate to your eventual state pension. As the state pension is currently £185.15 per week, this boost is worth £5.29 per week or around £275 per year. Someone who gets this boost for at least four years will recover their initial outlay (net of basic rate tax) and everything beyond that would be profit.
In an extreme case, someone who missed the deadline would lose the chance to top up a further ten missing years of NI contributions (from 2006/07 to 2015/16 inclusive). Although the outlay would be £8,242 (ten lots of £824.20), the annual state pension boost would be around £2,750. Someone who was retired for twenty years would get back around £55,000 in total (before tax) for a one-off payment of a little over £8,000.
In an extreme case, someone who missed the deadline would lose the chance to top up a further ten missing years of NI contributions (from 2006/07 to 2015/16 inclusive).
Will it be worth it?
Clive Barwell, Wren Sterling’s Head of Later Life Advice says clients who think they could qualify for this boost to their state pensions should contact their adviser as soon as possible: “Having a discussion with your financial planner would include a “return on investment” calculation and consideration of your life-expectancy. It will not always be smart to make these voluntary payments to the DWP, but as this is a ticking clock, it’s absolutely worth having the conversation now.”
Clients will need to deal with the Future Pension Centre at the DWP directly in order to process their claims and anyone thinking of topping up their state pension for these earlier years must check with the DWP before making such contributions. This is because there are some situations in which paying historic contributions would not boost your state pension. This could be particularly true for those who are short of a full state pension because of extensive periods of ‘contracting out’.