The state pension forms the backbone of many people’s retirement plans. So ensuring you have enough National Insurance (NI) contributions for your full state pension entitlement is important. Since the new state pension was introduced, the Department for Work and Pensions (DWP) relaxed the rules on topping up your NI for your state pension, but only until April 2023. With the deadline looming, we look at why it might be high time you checked your record and the difference it can make to your retirement plans.
Let’s look at a recent, real-life situation with one of our valued clients. We’ll call her Suzy…
Case study: Topping up NI for state pension shortfall
Suzy (anonymised for this article) came to us seeking advice. She had already chosen to defer taking her state pension for 4 years. Our team looked into Suzy’s state pension entitlement and requested that she access her NI records online.
Suzy only had 17 full years of NI contributions out of a maximum of 35 years to qualify for the full state pension. So, despite deferring her pension and receiving an uplift for those deferred years, she was only going to receive just under £5,000 per year in state pension income. As a comparison, for those reaching State Pension Age after 6th April 2016, the full state pension is currently £9,627.80 per year (2022/23).
Having requested an up-to-date NI record, it then transpired that Suzy might be eligible to top up 9 years of incomplete NI contributions, from 2006-7 to 2014-15. This needed to be dealt with quickly due to upcoming restrictions in the period allowed to make voluntary contributions. From 5th April 2023, when the transitional rules stop, you will only be allowed to top-up gaps from the previous 6 years.
It was calculated that the cost to Suzy of making these contributions would be £7,400. As a result, her state pension would increase from just under £5,000 per year to almost £9,000 per year. It wasn’t clear, however, if Suzy could top up her contributions, given that she had already passed her State Pension Age.
But after lots of phone calls, it was a success. Suzy is now better off by £4,000 annually (plus inflationary increases each year thereafter). Although Suzy had to pay the large upfront lump sum of £7,400, when you factor in the additional pension income she will receive each year, Suzy will recoup this amount within 2 years. And what’s more, it’s an extra £4,000 in guaranteed income added to Suzy’s retirement plans, along with incremental increases for the rest of her life.
Suzy and her husband were delighted with our support and planning, which has given them all the reassurance they need for a securer future. They told us they “have slept soundly since our first meeting”. And it just goes to show the difference financial planning can make.
It’s important to add that not everyone’s situation is like Suzy’s, and you could potentially plug your NI gap and see no gain. So careful consideration of the figures and support from a financial planning expert are essential.
How can you avoid a state pension shortfall?
Are you worried that you might have a state pension shortfall due to missed national insurance (NI) contributions? This could be due to parenthood, long periods of sickness, or time away from work for another reason. You can check your state pension forecast via the government website, where you will find an accurate record of your NI contributions.
Depending on your age, there are different rules around topping up NI for your state pension. There is a new state pension for men born after 5th April 1951 and women born after 5th April 1953. The “transitional arrangements” end on 5th April 2023, after which you will only be able to make voluntary contributions for gaps up to 6 years prior. For detailed guidance, please read our article Winning the state pension lottery.
Pension rules are regularly under review, including a new proposed pension age of 68 in line with the continuing increase in people’s life expectancy. Depending on your retirement plans, the state pension alone may not be enough to support you with your aspirations. So, why not speak to our financial planners about private pension planning? We can help you plan and manage your pension and retirement income.
If you need a pension review or advice on retirement income, please get in touch with our independent financial planning team.