Money
Pensions
Maximising your pension
Giving the Revenue £300 now could boost your state pension by £150 a year for life, but Byzantine rules mean that only some can take advantage of this bargain — and some of those should not, says Paul Lewis
Here's what the new rules mean: from April 6 more than three million people will be able to buy extra National Insurance contributions to make sure they get a full basic state pension if they are not already entitled to one.
The people who benefit are those reaching pension age between April 6, 2008 and April 5, 2015, but there are of course differences between men and women because their pension ages are different. The change applies to men born between April 6, 1943 and April 5, 1950, and women born between April 6, 1948 and October 5, 1952. This is because between April 2010 and April 2020 the pension age for women is rising from 60 to 65, so that in 2015 – halfway through the age change – the youngest woman eligible to buy extra National Insurance will be 62 years and six months old.
The basic state pension is, at best, £95.25 a week, but to get even this modest sum you have to jump through hoops if you have not paid enough National Insurance contributions. Barely one in three women and only about nine out of 10 men retire on a full pension. For various reasons people have gaps when they did not pay contributions.
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, too, will change and anyone – man or woman – who reaches pension age from April 6, 2010 will need only 30 years' contributions to get a full pension, which means men born from April 6, 1945 and women from April 6, 1950. That leaves a huge difference between men and women born before April 6, 1945 or 1950 and those born on that date or later.
Imagine twins, one born just before midnight on April 5, 1945, the other born a few minutes later — on April 6. Both twins reach 65 in 2010, but the first will need 14 years' more contributions than his brother to get a full pension. Suppose each has just 30 years' contributions: that will be enough to earn the younger twin a full pension, but the older one will get only 30/44ths of it, or £65.73 a week at current rates.
That difference of nearly £30 a week will last for life. Similarly, a woman born before April 6, 1950 who has 30 years' contributions will get 30/39ths of the full pension, or £73.35, while her sister born later will get more than £20 a week more.
Under current rules people can buy additional contributions for the past six years – and in some cases for the past 12. But many gaps occurred much longer ago than even 12 years, so the new rules applying from this April will allow people to buy six years of extra contributions going back to 1975/76 – but only if they reach pension age from April 6, 2008.
Is it worth it?
From April 2009 the cost of these voluntary National Insurance contributions is going up from £8.10 a week (£421.20 a year) to £12.05 (£626.60 a year). The Government says the contributions will be more valuable from April 2010, when the eligibility requirement reduces to 30 years, making each year's contribution worth more. However, people who reach pension age before April 6, 2010 will receive only the lower boost to their pensions while paying the higher rate for their extra contributions.
Some extra contributions will cost less than £12.05. Men born before October 24, 1939 and women born before October 24, 1944 can still buy the years back to 1996/97, if they do so before April 6, 2010, and those six years are charged at a special rate between £309 and £351 each. Contributions for the previous two years are charged at original rates, £8.10 a week for 2008/09 and £7.80 for 2007/08.
At any price extra contributions are good value. Each year boosts the pension by £100 or £150 a year for those who reach pension age before April 6, 2010 and by £150 or £200 a year for others, so pay-back is rapid.
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 plus two whole tax years after they stopped. Women who leave work to look after children are given what is called Home Responsibilities Protection (HRP) for the years they get child benefit and that can boost their pensions. However, if they were paying married woman’s contributions, HRP does not begin until two whole tax years after they stopped work.
HRP is being scrapped for women born on April 6, 1950 or later. Instead they will be given National Insurance credits for weeks in which they received child benefit, though there will still be exclusion periods.
The rules for buying the contributions back to 1975/76 exclude people who do not already have at least 20 years' contributions (including HRP). They can, however, buy the past six years' contributions.
Who shouldn't buy them?
It is worth buying contributions only if your pension is going to be less than 100% – and you should make sure you buy only those needed to reach that. Bear in mind that widows will normally have a 100% pension on their husbands' contributions.
Married women can get a pension, based on husbands' contributions, equivalent to about 60% of a full pension, so should not buy extra contributions unless it will boost the pension to more than this amount.
A woman who reaches pension age before April 6, 2010 needs 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. Divorced people can use ex-partners' contributions before buying extra.
If you or your partner claim pension credit there may be no advantage in boosting your state pension. This means-tested benefit tops up your income to £130 a week if you are single and to £198 a week for a couple. Every pound in extra basic state pension you buy will reduce your pension credit.
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 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
Written by Paul Lewis. Paul is the editor of Saga Magazine's Money News section. Paul's opinions are his own and for general information only. Always seek independent financial advice. This article was first published in the April 2009 edition of Saga Magazine.
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