Your state pension will always form at least a part of your income in retirement. Anyone coming under the new state pension system can top-up their state pension at favourable rates. This includes those reaching pension age after April 5 2016. HMRC are offering concessionary rates for those wishing to top-up their national Insurance (NI) contributions now.
However, these special rates expire on April 5 2019, after which back-filling the same years could cost significantly more.
As a responsible personal financial adviser, I’d like to draw this issue to the attention of my clients and contacts.
Understand Your State Pension Entitlements
I’m sure that lots of people will be unaware that the cost of filling historic gaps in their NI record is due to increase in April. I recommend that anyone thinking of filling such gaps, if it’ll increase your pension by doing so, should consider topping up before April 6.
Many people don’t realise that they have gaps in their NI records, so it’s always worth checking. Firstly, get a State Pension statement which will tell you how much State Pension you may get. Secondly, you can then apply for a National Insurance statement from HM Revenue and Customs (HMRC) to check if your record has gaps.
For someone with NI contribution gaps and reasonable life expectancy, topping up the State Pension is with normally give a good return on your investment. The only significant risk is longevity. You may not get back what you put in, in the event of early death. As a long-term financial planning strategy, however, it probably makes sense to top-up your State Pension.
In general, the cost of buying a year post 2016/17 is £740 and could increase state pension by up to £245 per annum. So, you’ll need to survive about 3 years from state retirement age, to make it worthwhile, which hopefully most people will. That does assume you’re a non-tax-payer by then. For a basic rate taxpayer break-even is nearly four years, and for a higher rate taxpayer just over five.
Topping up your State Pension before April is sensible into order to benefit from the current, concessionary rate. Making up any gaps after April 5 will most likely cost you a lot more for the same benefit. And increase your risk of not getting a positive return, too, of course.
At present, anyone covered by the new state pension system with a gap in their NI record for any year from 2006/07 to 2015/16 has until April 5 2023 to fill those gaps. On the face of it, this means that there is no rush to do so. However, under a special concession, those who pay voluntary contributions by April 5 2019 qualify for special rates.
Also, I recommend that my clients obtain a state pension statement in order to find out where they stand as they approach their target retirement age, irrespective of whether that’s the same as their state pension age.
If you find yourself not working, or eligible to obtain credits in another way, via receipt of carer’s allowance for example, then it’s worth looking at ‘topping up’ where possible.
To summarise, topping up your state pension is a good way to increase your guaranteed income in retirement with minimal outlay. And those benefits should increase further with ‘the triple lock’ of increments.