Thousands could miss out on £60k state pension boost

Experts from interactive investor are warning that “thousands of savers could be missing out” on the opportunity to boost their pension pots by £60,600 over 20 years unless they “act now” and buy the voluntary National Insurance contributions they may need to qualify for the full state pension.

To qualify for the full new state pension, Britons need to have 35 years of National Insurance (NI) contributions, or NICs.

The full new state pension rate is currently £185.15 a week (£9,630 a year), however, this will rise to £203.85 a week (£10,600 a year) in April after the triple lock guarantee granted pensioners a bumper 10.1 percent increase.

According to the firm’s calculations, buying an extra 10 years of National Insurance contributions would cost £8,242 for employees – but they only have until April 5 to act.

That’s because, under normal rules, it is possible to fill gaps in a NI record for up to six years, meaning savers can plug gaps going back to 2016/17 at present.

However, special rules allow eligible candidates the opportunity to go back a further 10 years (to 2006-07), so long as they do so before the tax year-end deadline on April 5, 2023.

This arrangement is only available for people who will claim the new state pension and reach the state pension age on or after April 6, 2016.

To buy extra years, Britons must pay ‘voluntary class three NI contributions’. At present, voluntary class three NI contributions cost £15.85 a week or £824.20 for the year.

With each lump sum adding up to 1/35 of the full state pension, one year’s worth of voluntary NI contributions can boost payments by £5.29 a week or approximately £275 over the year.

Myron Jobson, senior personal finance analyst at interactive investor, said: “Rampant inflation, which is being felt most acutely by the amount we spend on energy bills and groceries, continues to weigh on finances, but if you can afford to do so, plugging gaps in NI could pay dividends when you retire.

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“Even purchasing a single year of NI contributions at the cost of £824 could turbocharge your retirement income to the tune of £6,060 over 20 years – and greater longevity means that more and more of us would be alive to receive the bumper benefit. The sum would be even higher once inflation is factored in.”

Mr Jobson continued: “Those with gaps in their NI dating back to more than six years are in a race against time to fill them, as the window to do so closes on April 5.

“Most of us will rely heavily on the state pension to fund a comfortable existence at retirement, so it is well worth doing if you have the means to do so – and the benefit of doing so would grow further the deeper you get into retirement.”

According to calculations from interactive investor, somebody purchasing 10 years of NI contributions at the cost of £8,242 (10 x £824.20) could boost their state pension by almost £61,000 over a 20-year retirement, £30,000 over 10 years and £15,000 over five years.

This is based on the new full state pension payment of £10,600 for the 2023/24 tax year. However, the firm notes that calculations do not factor in inflation, so the potential boost in state pension payment is “likely” to be a lot higher.

Purchasing six years of NI contributions at the cost of £4,945 could translate to an additional state pension of £36,000 over 20 years, £18,000 over 10 years, and £9,100 over five years.

Even purchasing one additional year of NI contributions at the cost of £824 could result in a significant uplift in state pension – £6,100 over 20 years, £3,000 over 10 years and £1,500 over five years.

Mr Jobson said: “If you are unsure if you have any gaps in your NI record, you can check this through the Government website.

“It has never been more important to pay attention to changes affecting the state pension – even if you are not near the state pension age.

“Changes to rules on voluntary NI contributions and rumours that plans to increase the state pension age from 66 to 68 could be brought forward could significantly reduce the quality of life at retirement for those caught unaware.”

When plugging NI gaps isn’t suitable

While plugging National Insurance gaps can make for a worthwhile investment, there are instances when it may not be the most lucrative.

Alice Guy, head of pensions and savings at interactive investor, said that while a person will only need to live for four years into retirement to claw back the extra contribution, there are a few things to watch out for and paying voluntary national insurance contribution isn’t suitable for everyone.

She said that first, “it’s important to check the Government website to see if you have gaps in your National Insurance record before you make additional contributions.”

Ms Guy explained: “There’s no point buying additional contributions if you already have or are likely to have 35 years of national insurance contributions as you’ll already be entitled to a full state pension.

“You may have built up more years than you think as you can get national insurance credits for some years you haven’t worked, like caring for children under 12 years old or caring for a relative if you receive Carer’s Allowance.”

Secondly, she pointed out: “There are some circumstances where you may not be able to plug the gap for missing contributions, for example, if you were contracted out during those years, which was the case for some older workers with certain pension schemes. It’s worth ringing the DWP helpline to check.”

In extreme cases, she said those who survive 20 years may be able to boost their state pension by £96,960 for an original extra National Insurance contribution of only £13,187.

Ms Guy explained: “The actual sum you receive could be even more as the state pension goes up with inflation over time.”

However, she noted: “You’ll also have to pay income tax on your pension income, depending on your other income so you could receive slightly less in your pocket.”

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