Looking to maximise your income in retirement? A good place to start is with your State Pension.
If you’re not getting the full amount or are not on track for it, then, as highlighted in Royal London’s State Pension Guide 2018, it’s worth considering topping up.
“The cost of doing this is effectively subsidised by the Government which means it can be very good value for money,” it notes.
The amount of State Pension you get is based on your National Insurance record. If you haven’t made enough contributions then you won’t get a full State Pension. But you may be able to pay voluntary contributions to boost the amount you get, even if you have already retired.
The rules about who can top up, how much it costs and what impact it will have on your State Pension are complex and have changed.
The old system applies to people who reached State Pension age before 6 April 2016 (even if they have deferred taking their State Pension). So that is men born before 6 April 1951 and women born before 6 April 1953. A new system took over for all those subsequently reaching State Pension age.
Consumers’ champion Which? is equally informative on the subject via its guide, National Insurance and the State Pension..
Which? states: “How many full National Insurance qualifying years you have is important as it will go some way to determining how much state pension you’ll get.
“Previously, you were entitled to a full pension after 30 years of National Insurance contributions. It’s now 35.
“To qualify at all, you need 10 years of National Insurance payments.
“You will need to access your National Insurance record to check if you have any gaps, if you’re eligible to pay voluntary contributions, and how much it will cost. Visit the Check your State Pension website to get a summary of your National Insurance history.”
People who opt to make voluntary payments most commonly do so via what is known as Class 3 contributions and usually within six years of the year in question, although there are some exceptions.
In annual terms each year of voluntary NICs could increase your State Pension by around £244 per annum – for a maximum cost of £762. You can see therefore that you would recoup this initial outlay within just over three years and be “winning” thereafter.
However, just because you can fill gaps in your record, it doesn’t necessarily mean you should.
Check your ‘Personal Maximum’ figure on the ‘Check your State Pension’ website. This is the most you can get in State Pension if all the gaps in your record were filled.
If your Personal Maximum is greater than or equal to the full flat rate of £164.35, it may be that you’ll get a full State Pension without needing to pay any voluntary contributions.
Another important consideration is that if you are under State Pension age there may be no rush.
Whilst filling a gap in your contribution record will boost your pension when you draw it, you gain no immediate benefit from doing so.
Royal London suggests: “You may wish to consider setting aside the money that you plan to use for voluntary contributions, enjoying some return on the capital and then using it to buy missing contributions either when you reach State Pension age or within six years, whichever is sooner.”
Nevertheless, it continues: “If you can afford to make voluntary Class 3 NICs, the rewards can be large relative to the cost of doing so.”
So go into all this thoroughly. It is well worth investigating.