Some people are fortunate enough to be able to retire well before their State Pension age. However, early retirement and the freedom it brings may sound great, but are you missing out on an opportunity to build up the best value State Pension available?
New State Pension
The new State Pension, introduced on 6 April 2016, gives you the opportunity to top up your national insurance contributions to boost your state pension income.
New State Pension facts:-
- Men born on or after 6 April 1951 are eligible
- Women born on or after 6 April 1953 are eligible
- The full new State Pension is £164.35 per week, or £8,546.20 per annum
- You need to have paid at least 35 years of National Insurance (NI) contributions to get the full pension amount
Things that can affect your new State Pension
Years of NI contributions – you must make more than 10 years’ NI contributions to receive any new State Pension. To get the full pension amount you need at least 35 years of full NI contributions. If you have paid less than 35 years NI contributions the amount of pension you get will decrease.
Contracting out – you may have ‘Contracted out’ through company and personal pensions in the past. Contracting out will have affected your NI contributions and this in turn could mean your entitlement is lower. This will only be the case if your total years’ NI contributions minus the amount of years you Contracted out for is less than 35 years.
What can you do?
You can make additional payments to cover any missing years of NI contributions. These are called Class 3 contributions. You need to make these Class 3 contributions within six years of the missing year(s). For example, if you missed NI contributions in the 2012/13 tax year you would have to make this up by the end of the 2018/19 tax year.
If you are not working or only earning a small amount of money (under the NI threshold) you can still make voluntary National Insurance contributions to make up to full NI contributions for that year.
The cost of your additional contributions will vary depending on the year that was missed retrospectively or the amount of years you are making up going forward.
For example, Bill (aged 64) has 34 years of contributions because he missed making any NI contributions in 2014/15. He needs to make an additional contribution of £722.80 in this tax year to make this up. This will increase his pension amount by £244.17 per annum, which is inflation-proofed. The initial outlay could be recouped within 4 years.
Another example is Ben, aged 55. He has stopped working at the end of 2017/18 so no longer pays NI contributions. Ben has 30 years of NI contributions and would like to maximise his State Pension. He can choose to make a Class 3 NI payment of £761.80 in 2018/19. This will increase his pension amount by £244.17 per annum, which again is inflation-proofed. This outlay could also be recouped within 4 years and he can repeat this exercise for the next 4 years to maximise the amount he gets.
Making sure you know what you will get
Many people are unaware of the amount of new State Pension they will receive, but it is easy to find out.
You can get a State Pension online forecast through the Government Gateway website (an online account is required). It will tell you what level of pension you can expect at your State Pension Age and how many more years of NI contributions you need to pay to get this. The State Pension age is regularly reviewed, so remember that this could change in the future.
You can use the data from your pension forecast to put together a picture of your retirement income. Remember to include any Contracted out monies you have in a private pension, as this will also form part of your retirement income, on top of the amount of State Pension you receive.
If you find you are unsure of your situation and need some clarification, you may want to seek professional advice. Our qualified and regulated financial advisers are here to help with planning your retirement.
This article is based on current State Pension figures and legislation as at July 2018.