What you need to know when topping up your State Pension
Figures show a huge surge in the number of people making voluntary National Insurance contributions to top up their State Pension record. It could help you increase your retirement income but there are some things to be aware of before you proceed.
The State Pension often provides a foundation to build your retirement income on. As the State Pension provides a reliable income source, it can provide security. But, how much can you expect?
The full State Pension for 2019/20 is £168.60 per week; £8,767.20 annually. However, to receive this amount, you must have 35 years on your National Insurance record, and this is a key reason why people are making voluntary National Insurance contributions.
If you have less than 35 years on your National Insurance record, you’ll receive a portion of the full State Pension. There are many reasons why you may have a gap in your record and voluntary contributions give you a chance to fill these gaps.
If you’re worried about the amount you’ll receive from the State Pension the first thing to do is get a forecast, which you can do here.
Voluntary National Insurance contributions surge
Figures show that the number of people making voluntary National Insurance has increased.
The statistics released by HM Revenue & Customs found that £119.3 million was paid in voluntary Class 3 National Insurance contributions in 2018/19. This compares to just £12.8 million in 2016/17. That means there’s been a nine-fold increase in only two years.
Paying voluntary contributions is a way to protect short-term benefits. However, the surge coincides with changes in 2016 to allow more people to increase their State Pension. Whilst this can be useful, it isn’t always the right path for you.
Steve Webb, Director of Policy at Royal London, said: “It is great news that the message is getting out there that topping up your State Pension can be a very effective way of using your money. For those who will not otherwise get a full State Pension, the cost of voluntary National Insurance contributions will often be recovered in full within three or four years of retirement, as the rate is heavily subsidised by the government.
“But it is important to be careful which years are bought back, as in some cases paying extra National Insurance will not always increase your pension.”
5 essential questions before making voluntary contributions
After doing a State Pension forecast, if you find you may receive a reduced amount, it’s important you understand the restrictions and the impact it’ll have.
1. How many years can you contribute?
Usually, you can make voluntary contributions for the past six tax years, which end on the 5th April each year. As a result, if you have gaps in your National Insurance record going back more than six years, you may not be able to increase your State Pension.
However, in some cases, it is possible to fill in gaps from more than six years ago depending on your age, so it’s worth checking.
2. How much does it cost to fill in National Insurance gaps?
There are two rates depending on the class of National Insurance. Class 2 National Insurance contributions are used for self-employed workers. For 2019/20, the rates are:
£3 a week for Class 2; £156 for a year
£15 a week for Class 3; £780 for a year
The amount you have to pay to add a year to your National Insurance record will depend on whether you already made a contribution during that year. For example, if you made National Insurance contributions for 30 weeks, you’d only need to purchase the additional 22 to make up the year.
3. Can you make voluntary contributions if I’m already claiming the State pension?
Yes. If you started claiming your State Pension less than six years ago, you can still make voluntary contributions.
Your State Pension payments will increase as soon as your voluntary contribution is received. However, it will not be backdated. You should consider this when calculating whether it’s a step that’s worth it in your situation.
4. Would it affect means-tested benefits?
Do you currently claim means-tested benefits? Or expect to do so once you retire? Increasing your State Pension could affect your eligibility. Your State Pension is classed as income. As a result, even a small increase may affect the support you receive and could mean you’re no longer eligible at all if you cross thresholds.
5. What impact would voluntary contributions have on your State Pension?
Before you decide to top up your National Insurance contributions, make sure you understand what it’ll mean for you. When you look at the additional income that you’d receive compared to the outgoing, you may decide it’s not worth it for your situation. This is an area we can help you with.
If you’d like to discuss your State Pension and your wider retirement income, please get in touch. We’re here to help you understand how to get the most out of your finances as you approach retirement with your aspirations in mind.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.