I'm retired – can I still pay extra NI to get a bigger state pension?

I retired after 42 years working in a UK university where I was a member of an occupational pension scheme that was ‘contracted out’ of SERPS.

As a result, I am not in receipt of a full state pension.

I wonder if it would now be possible for me to make additional National Insurance contributions so that I can receive a full (or higher) state pension?

I am 68 and retired at age 60.

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Retirement planning: I've passed state pension age so can I still pay extra NI to get bigger payments?

Retirement planning: I’ve passed state pension age so can I still pay extra NI to get bigger payments?

Steve Webb replies: The good news is that you, and many thousands of other people in a similar situation, may be able to top up your state pension at very favourable rates.

Let me start by setting out the basics of how state pension top-ups work, as well as some ‘golden rules’ to bear in mind, before coming on to your individual situation.

Under the National Insurance system there are different ‘classes’ of NI Contributions which people may be legally required to pay.

For example, employees who earn above a certain level have to pay ‘Class 1’ contributions and the self-employed with profits above a certain level have to pay ‘Class 2’ contributions.

But it is possible to make contributions on a voluntary basis.

For most people these are known as ‘Class 3’ contributions, although people who are self-employed and on a low income can pay Class 2 contributions on a voluntary basis.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

The current rate of Class 3 contributions is £15.85 per week or just under £825 for a year. Class 2 contributions cost £3.15 per week or just under £164 for a year.

The way that voluntary NI works is that you pay money to HM Revenue and Customs in the form of voluntary contributions for a particular year or years and this improves your NI record when it comes to working out your state pension.

This normally has to be done within six years of the year in question, but until the end of this financial year it is possible for people who come under the new state pension to go all the way back to 2006/07.

Because the rates of voluntary NI are subsidised by the Government, topping up can often be very good value.

For example, paying a one-off lump sum of Class 3 NI for one year costs just under £825 but can boost your state pension by up to £275 per year for the whole of your retirement.

Allowing for tax on your pension, most people would get their money back within four years and anything after that would be profit.

There are several golden rules to bear in mind before considering paying voluntary NI.

1. Make sure you are getting any credits you are entitled to before paying voluntary NI for a particular year.

For example, grandparents under pension age may be able to get credits towards their state pension if they are looking after a grandchild, enabling the child’s parent to go out to work.

As NI credits don’t cost anything, you should always claim what is available for free before paying voluntary NI for any given year.

What happens if you buy worthless state pension top-ups? 

This is Money and our sister publication Money Mail called for an overhaul of the state pension top-ups offered to millions of savers after a deluge of complaints from readers about the confusing and chaotic system.

More recently we have covered cases of savers who paid thousands of pounds for state pension top-ups and saw their money disappear without explanation for months, until This is Money intervened.

Some people have waited months to receive information from the Department for Work and Pensions about which years to buy and what amount and how to pay.

Read more below about Steve Webb’s new initiative to help people check where they stand when making top-ups to their state pension.

2. Whether or not it makes sense for any given individual to top up depends on their individual circumstances.

You should always start by checking your state pension record at the Government’s web page.

This may tell you, for example, that you are already going to get the maximum state pension and therefore don’t need to make any voluntary contributions, even if you have some gaps in your record.

3. Some years may be cheaper to fill than others. If, for example, you worked for part of a year, you may find that you can complete that year more cheaply than filling a year that was completely blank.

4. Always check before handing over any money. The rules are complex and you can sometimes fill a gap which makes no difference to your final pension.

If you are planning to top up a particular year, contact the DWP’s Future Pension Centre to make sure it will boost your pension.

5. Fill gaps at the Class 2 rate if you can. As noted above, voluntary NI for the self-employed is much cheaper than for employees.

If you had low-income self-employment in a particular year and have a gap in your record, you should be able to pay at the Class 2 rate for that year, which will save you money.

Turning now to your individual situation, it is important to understand how the new state pension works.

In brief, the Government takes a ‘snapshot’ of your NI record as at 6 April 2016 when the new system was introduced.

Your entitlement at that point is called your ‘starting amount’. If that amount is less than the full flat rate, any year from then on adds 1/35th of the full rate to your starting amount until you reach the full flat rate of £185.15 per week.

In your case you have said that you retired eight years ago, so you were already retired by 2016. 

You already had thirty years in the system by then, and thirty years was all that was needed for a full basic pension under the old rules. 

This means that topping up any years before 2016 is very unlikely to add to your state pension.

However, if all your years since 2016/17 are gaps, and if you are short of the full flat rate, then one or more of those years could potentially be filled. 

Each would add to your pension until you reach the full flat rate (though you can’t go above the flat rate through this route).

Do YOU plan to top up your state pension?

As it can be complex to work out whether or not to top up your state pension, I am currently putting the finishing touches to a new website which would help people to know where they stand.

This site asks people to visit the gov.uk website to find out their own NI record and then helps to ‘decode’ the information which they will find there.

We are doing the final testing on the site at present and would appreciate it if a few readers of This is Money were willing to give it a try and give us their feedback on how they found it.

If you would be willing to do this, please email me at [email protected] and I will send you the link to the test site. We hope to launch the full site shortly.

Please put TOP-UPS TEST in the subject line if you want to know more about the new site. Emails about this will be forwarded on to Steve Webb and he will use the details they contain to contact you direct.

Ask Steve Webb a pension question

Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at [email protected]

Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.  

TOP SIPPS FOR DIY PENSION INVESTORS

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