Pensions - Articles - Deadline nears for plugging NI gaps back to 2006

 You need an NI record of at least 10 years to receive any state pension, with deductions made for any missing years

 Usually, you can only plug NI gaps from the previous six tax years - but transitional measures introduced alongside the 2016 reforms allow people to fill gaps all the way back to April 2006

 If you have worked abroad, earned a low salary or had gaps in employment, you might have holes in your NI record

 Those who previously ‘contracted-out’ of the state pension may also have missing NI years – although not everyone will boost their entitlement by making voluntary NI contributions

 Buying one year of NI contributions could boost your annual state pension entitlement by £275 a year – at a bargain price of just £824

 Someone who receives this state pension boost for 3-4 years or more should be in ‘profit’

 Anyone considering paying voluntary NI contributions should contact the Future Pension Centre first

 Tom Selby, Head of Retirement Policy at AJ Bell, comments: “Brits face a race against time to take advantage of transitional measures and boost the value of their state pension – potentially by thousands of pounds.

 “This time-sensitive opportunity exists as a result of state pension reforms introduced in 2016. As part of those reforms, the usual six-year window to plug gaps in your NI record was extended, allowing people to boost their entitlement all the way back to April 2006.

 “However, those transitional arrangements come to an end in little over a month’s time on 5 April this year.

 “Frustratingly, reports suggest telephone logjams are making it extremely difficult for people attempting to pay voluntary NI before the April deadline. While the Government says it will consider late payments on a case-by-case basis, as things stand there is no clarity on exactly how lenient or otherwise HMRC will be.

 “Anyone who has worked abroad, earned a salary below the NI threshold or had gaps in employment could have gaps in their NI record. In some, but not all, cases, plugging these gaps could boost your state pension income by thousands of pounds.”

 A £275 annual income boost for just £824…

 “While some of the jargon and complexity involved might be off-putting, boosting your state pension entitlement can be an extremely savvy move financially.

 “You usually need to pay voluntary ‘Class 3’ NI contributions to top up your state pension entitlement. It costs £15.85 to buy one week’s worth of Class 3 NI, or £824.20 per year.

 “Based on someone increasing their entitlement to the ‘new’ state pension (worth £185.15 per week in 2022/23), that could result in an income boost of £5.29 per week or £275.08 per year.

 “What’s more, that income will be protected by the ‘triple-lock’, meaning it rises every year by the highest of average earnings, inflation or 2.5%. In April this year, the state pension will increase by a whopping 10.1%, in line with inflation in September 2022.

 “Broadly speaking, anyone who increases their state pension on these terms will need to live 3-4 years in order to be in ‘profit’ from the deal.

 “Given average life expectancy at state pension age is around nine years for men and 11 years for women – with a decent chance of living into your 90s – those in good health who can boost their state pension could benefit handsomely by doing so.

 “However, in some circumstances paying voluntary NI contributions will NOT boost your state pension (see examples below). The Government’s Future Pension Centre should be able to tell you whether topping up your NI voluntarily will boost your state pension income.

 “If you are considering voluntarily buying NI, it is vital you contact the Future Pension Centre before parting with any cash, as if you buy NI years and it doesn’t boost increase your state pension, there is no guarantee you will get your money back.”

 Buying extra state pension years doesn’t always make sense…

 “Although in some circumstances paying voluntary NI will be a financial no-brainer, this is by no means always the case.

 “Most obviously, the younger you are, the more likely you are to naturally build up the 35-year NI record needed to entitle you to the full state pension. In these circumstances, buying extra NI risks being a complete waste of money.

 “If you have had gaps in employment due to caring for children or elderly relatives, you might be entitled to NI ‘credits’. These credits give you exactly the same entitlement to the state pension as voluntary NI contributions – but at zero cost.

 “In addition, anyone who previously ‘contracted-out’ of the state pension under the old system (which existed before 6 April 2016) might also be entitled to less than the full state pension - even if they have a 35-year NI record.

 “Contracting out (which no longer exists) just meant you paid lower NI and in return didn’t receive entitlement to the state second pension (the state pension used to be made up of two parts – the basic part and the state second pension, which was previously called ‘SERPS’).

 “If you have previously contracted out, a deduction will be made to your state pension entitlement. If you aren’t entitled to the full state pension as a result of being contracted out, you can buy extra NI years to make up the gap.

 “However, not everyone who was contracted-out will benefit from buying extra NI years. This is quite complicated and will depend on what you’d have been entitled to under the old system. If you are in this position, contact the Future Pension Centre to find out if buying extra NI would boost your state pension.”

 ‘Do a Columbo’…

 “One more thing – your state pension will count towards your income tax bill. That means that by increasing the value of your state pension, you could also push yourself into a higher income tax bracket.

 “Where this is the case, the benefit of buying extra state pension years will effectively be lower and so it will take a bit longer to ‘break even’.

 “In many cases it will still be worthwhile to buy extra NI years but you should take the time to fully think through the financial implications, ideally with the help of a regulated financial adviser.”

 Useful resources

 Full details of the Future Pension Centre are available here: Contact the Future Pension Centre - GOV.UK (www.gov.uk)

 You can check your state pension forecast here: Check your State Pension forecast - GOV.UK (www.gov.uk)

 If having consulted the Future Pension Centre you decide you want to pay voluntary NI, details for contacting HMRC are here: National Insurance: general enquiries - GOV.UK (www.gov.uk)