Pension Stuff

This article was originally written in Autumn 2016, and all figures quoted refer to the 2016 - 2017 tax year.

According to the government, I am officially 'unemployed and not claiming benefits'. This is because when I was made redundant in 2012 at the age of 57, I decided to effectively retire, although I am not able to draw my State Pension until my 66th birthday in March 2021. In the meantime, I am able to survive thanks to the redundancy payoff, plus two small private pensions (for my wife and myself), and some savings. As I choose not to work, I am not paying NI contributions: If I were to sign on as unemployed, then my NI contributions would be paid, but I would receive no benefits as my pension income is above the means-tested threshold, and I would be required to accept offers of work, which I don't want to do.

I have now discovered that by not paying NIC I am reducing my State Pension entitlement, even though I already have an NI contribution record of 42 qualifying years, which is way above the normal requirement for a full state pension. To fully understand this, and how you could possibly also increase your State Pension entitlement, then read on.

The first thing to do is to apply to HMRC for a State Pension Statement. Mine showed that the starting amount for my State Pension would be £125.46 per week, which is well below the widely publicised full amount for the new State Pension of £155.65, even though I have more than the maximum number of NI qualifying years. This is explained by the fact that in the past I was part of a 'contracted out' private pension scheme, and my then-employer paid lower rate NI contributions which benefited my private pension. Unfortunately there is nothing I can do about this, as it is all past history. Because my NI qualifying years under the 'old' pension system are already above the maximum required, I cannot benefit from topping-up NI contributions made before April 2016.

However, under the new pension scheme rules which came into effect in 2016, for every full year of NI contributions which I make between April 2016 and my State Pension age, I will receive an additional £4.54 per week of State Pension, up to the maximum of £155.65 per week. In my case, that gives me four full financial years in which I can pay Voluntary NI contributions in order to boost my State Pension starting amount. Note that only full financial years count: if I were to pay NI contributions for eleven and a half months from the start of the financial year in April 2020 until my State Pension age in March 2021, then it would be money down the drain.

From this starting point, the arithmetic is simple: the rate of voluntary Class 3 NI contributions is currently £733.20 per annum, which 'earns' an extra £4.45 State Pension per week: four years' NI contributions are therefore £2932.80 (this rate may increase over the next 4 years, but the principle remains). The benefit of paying four extra years NI contributions is 4 x 52 x £4.45 = £925.60 per annum. In order to receive back in pension benefits the extra NI contributions that I have paid, I therefore need to survive for only 3 years and 9 weeks past my State Pension age: everything after that is a bonus.

By making four years' worth of voluntary NI contributions, I am therefore raising my State Pension starting amount to £146.21 per week, which is still below the publicised full new State Pension amount of £155.65, but more than £20 per week better than the original starting amount that I was quoted. I would urge anyone else of a similar age to myself, who is also currently not working, but not yet receiving their State Pension, to look into this method of ensuring that they maximise their State Pension entitlement.

Disclaimer: 

Every effort has been made to ensure that the information in this article is accurate, but the above article should not be construed as professional financial advice and I disclaim liability for any loss, however caused, arising directly or indirectly from reliance on the information therein. You should always seek appropriate advice from a suitably qualified independent financial advisor before taking or refraining from taking any action affecting your pension.