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Ask an expert: ‘How can I increase my state pension now the top-up scheme is closed?’

What to do if you're missing years of National Insurance credits

Ask an expert: ‘How can I increase my state pension now the top-up scheme is closed?’

Every week, Which?’s money experts answer your financial queries. You can submit your questions to money-letters@which.co.uk, or via our Facebook or Twitter pages.

Q. I’m due to receive my state pension in October next year, and I’ve just received my pension forecast. Over a decent-paying career, which will end next year, I’ve been saving into the state pension for 30 years and I was expecting to get more than what my statement told me.

I heard there was a scheme to top up your state pension but it has just closed. What are my options?

Supplied via email. 

A. Working out how much state pension you’ll end up with has always been a confusing business, especially since the new ‘flat-rate’ state pension was introduced last April.

You were born in 1953 and, from what you’ve said, you’d have made 31 years’ worth of National Insurance contributions by the time you reach state pension age at 65, if you’re still working and paying National Insurance. This looks like the reason you’re disappointed with your statement.

People who’ve reached state pension age after 6 April 2016 qualify for the flat-rate state pension, which combines the old basic and second state pension into one amount. In the 2017/18 tax year, the full amount is £159.55.

But you need 35 years’ worth of National Insurance contributions to get this full amount, so you’re four years short and your state pension will have been reduced accordingly.

Each year’s National Insurance credit is worth £4.55 a week (159.55 divided by 35 years). So, I suspect that your lower-than-expected state pension is around £141, and you’ve lost around £18 per week by having a four-year gap in your National Insurance record.

Buying extra National Insurance credits

Now for the good news. You can buy up to six years’ worth of additional ‘voluntary’ National Insurance credits to plug the gaps and top your state pension up to the full amount.

You say you’ve had a ‘decent-paying career’. If you earn more than £113 a week, you’ll pay ‘Class 3’ National Insurance contributions to plug the gaps in your record. But the rate you pay will depend on when you have gaps in your record, and when you pay for them by.

Normally, you can only plug gaps from the past six tax years. But the government is allowing people to buy voluntary contributions from as far back as 2006 to ensure they don’t lose out from the changes to the state pension that were introduced in 2016.

And you don’t need to decide whether this is an investment you want to make right now – you can wait until 2023 to make a decision.

How much do voluntary contributions cost?

The rate for Class 3 National Insurance contributions in 2017/18 is £14.25 per week, or £741 a year, and you usually pay this amount to make up previous years’ worth of contributions.

However, a slightly reduced rate of £14.10 per week, or £733.20 a year, is applied for the 2016/17 and 2015/16 tax years.

And buried in the depths of the government’s advice on voluntary contributions is the opportunity to make up the gaps at a discounted rate – if you purchase them by May 2019.

If the gaps in your National Insurance record are between 6 April 2006 and 5 April 2010, you’ll pay £13.25 per week, or £689 a year.

For any gaps you have after 6 April 2010, the rates differ depending on the tax year in which your gap falls. We’ve laid this out in a handy table.

Tax year 2010/11 2011/12 2012/13 2013/14
Weekly rate £12.05 £12.60 £13.25 £13.55
Annual amount £626.60 £655.20 £689 £704.60
Tax year 2014/15 2015/16 2016/17 2017/18
Weekly rate £13.90 £14.10 £14.10 £14.25
Annual amount £722.80 £733.20 £733.20 £741

Should I buy voluntary contributions?

To fill all four years’ worth of contributions, you’re looking at an outlay of between £2,600 and £2,900, which will buy you around £900 of extra state pension income per year. So, it will take about three years to recoup the cost of buying additional credits.

If you’re in good health, the chances are you’ll be able to enjoy the ‘profits’ from this investment through increased state pension after those three years have passed. But if you’re not, you may want to weigh up whether your money might be better spent elsewhere.

Any increase in the state pension could also increase your tax bill. The state pension is paid ‘gross’ (untaxed) but a bump in your weekly pay, added to any other income, may push you into a higher tax bracket.

How to make voluntary contributions

You can check your National Insurance record online, and see where the gaps are.

Paying voluntary contributions is easy – all you need to do is set up a direct debit. The government has lots of information on different ways to pay.

Deferring your state pension

Another way to increase your state pension would be to delay when you take it.

If you defer your state pension for a year, it will increase by 5.8%. This would boost the current state pension to £168.80 per week.

However, this isn’t always the best deal – it takes around 17 years to earn back the year’s worth of state pension you’ve forgone.

Ending the state pension top-up scheme

You’re right that there was a scheme to top up your state pension, which closed in April 2017.

But this was only available for people who reached state pension age before 6 April 2016, and weren’t benefitting from the higher flat-rate pension.

It enabled them to buy up to £25 of additional state pension income in exchange for a cash lump sum. This, unfortunately, was never an option for you, but making voluntary contributions could help build up a bigger state pension for next year when you come to collect it.

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