At the end of your career, retirement is your chance to relax, focus on yourself, and live the kind of lifestyle you’ve spent years working towards.
So, it is vital that when that day arrives you have enough saved away to ensure you’re able to enjoy your desired level of comfort.
Pension savings are likely to form the bulk of your retirement income and the State Pension can make up a healthy portion of that.
However, the full State Pension is normally only available to you if you have accumulated 35 years of National Insurance contributions (NICs). You also need at least 10 years of contributions to be eligible for any State Pension.
So, if you find yourself short, it might be worth making up any lost contributions. Read on to learn about “buying” National Insurance credits to fill gaps in your contribution record and why you may need to move quickly with a deadline approaching.
The State Pension is likely to be one of your primary sources of income during retirement
The State Pension is payable from age 66 (rising to 67 from 2028) and provides a guaranteed monthly income throughout retirement.
The State Pension is protected by the triple lock, which forces it to rise each year in line with the cost of living.
The current full State Pension is £185.15 a week or £9,627 each year for the 2022/23 tax year and will rise to £203.85 a week or £10,600 each year from April 2023.
To be eligible for the full State Pension, you will need to have made at least 35 years’ worth of NICs before retirement.
You typically accumulate a year of “credit” if you:
- Worked and paid NICs
- Received them due to being unemployed, ill, or acting as a parent or carer
- Paid voluntary NICs.
It is possible to check your current National Insurance record online and determine how many years you are likely to need before retiring to obtain the full State Pension.
Your career may have created gaps in your NIC record — for example, if you spent time working abroad or outside of the workforce — so you may not currently be on track to receive the full amount.
However, it is possible to “buy” years retroactively to fill any gaps in your record and ensure you remain on track to unlocking your full State Pension.
The transitional arrangements of the new State Pension system mean you can plug gaps dating back to 2006, as long as you do so before July 2023
On 6 April 2016, the government introduced the new State Pension, and with it came a transitional period.
Although most people will require 35 years’ worth of NICs to qualify for the full State Pension, those who started their record before 2016 could need 40 years or more due to rules relating to their age and existing National Insurance records.
The government sought to allow people to plug this gap by allowing them to purchase credits dating back to 2006. However, this arrangement comes to an end on 31 July 2023, after which you are likely to only be able to fill gaps going back six tax years.
The returns on retroactively contributing to your State Pension can be huge, and if you’re eligible to buy credits dating back to 2006, it could be worth urgently acting before the window closes.
Before opting to buy additional years of State Pension, consider any alternatives first
Once you’ve checked your existing National Insurance record and determined if you have any existing gaps that may need filling, you might want to consider buying additional years by making voluntary contributions.
But before you part with any funds, it may be worth considering a few important alternatives such as:
- Reviewing whether you have any unused National Insurance credits for years in which you were entitled to benefits (such as unemployment, statutory sick leave, or when you acted as a carer)
- Establishing how many years of National Insurance credits you already have on record and how many more you will need
- Applying for a “specified adult childcare credit” if you’re an active grandparent and looking after grandchildren.
After fully reviewing your current situation, if it looks like there are still likely to be gaps, it may be worth buying additional years.
Acquiring additional credits could help boost your later-life income
According to MoneyHelper, the comparatively small cost of purchasing voluntary NICs could have huge returns for your eventual State Pension. Each additional qualifying year added to your State Pension is effectively worth £275.08 each year (based on 2022/23 rates).
The cost of purchasing contributions for previous tax years is £163.80 for a year of Class 2 and £824.20 for Class 3. Whether you pay Class 2 or 3 is dependent on whether you ever lived or worked overseas, as well as your employment status.
This means that for an initial outlay of between roughly £165 and £825, you would see a boost to your retirement income of around £5,500 if you lived 20 years past the State Pension Age.
Your investment would break even within three years at the Class 3 rate and in as little as eight months for Class 2. Everything beyond that is profit.
Get in touch
A good financial plan aims to ensure you have the necessary savings in place to unlock the kind of retirement you desire. Working with a planner to assess how to maximise your State Pension could have significant benefits in the long term.
If you want to know more, about whether making additional NICs would be worthwhile for you, email firstname.lastname@example.org or call us on 01189 876655.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.