Early retirees could find themselves significantly better off in retirement by topping up their National Insurance contributions.
Here, we take a look at how you can increase the number of qualifying years on your record and boost your state pension income when you retire.
Topping up your NI contributions
The amount of state pension you get depends on your record of National Insurance (NI) contributions. To qualify for the full state pension, you need 35 qualifying years.
In some cases, it’s possible to top up your record to fill gaps, and Class 3 NI contributions are the best way to do this.
Now that the 2017/18 tax year is over, the insurer Royal London says people retiring before state pension age should check their record to see whether 2017/18 counts as a qualifying year for them.
If not, it costs £761.80 to top up for the year, but Royal London says that doing so could add £244 a year to your earnings throughout retirement, meaning you’ll make your money back within four years.
How early retirees could benefit
If you’re under the state pension age but have retired early, topping up gives you the chance to build up your state pension.
Since the state pension rules changed in 2016, the government combines two different calculations to find the ‘starting amount’ for a state pension as of April 2016.
Royal London gives the example of a teacher retiring at the age of 60, drawing a teacher’s pension. This person wouldn’t get a state pension until the age of 66 – and if they don’t work again, their contribution will be based on their starting amount as of April 2016.
If, however, this figure is below the full state pension amount (due to having fewer than 35 years of contributions), they can make voluntary contributions for each full year from 2016/17 to the year before they reach state pension age.
This can be lucrative in the long run, as people who retire early will, in theory, benefit from the increased income for longer.
Steve Webb of Royal London says: ‘Topping up is particularly relevant to people who in the past were in pension schemes which were contracted out of part of the state pension system, and who will otherwise not get a full state pension as a result.’
Was 2017/18 a qualifying year for me?
The 2017/18 tax year was a qualifying year for you if:
- you worked throughout the year and paid NI contributions on earnings of £157 a week or more
- you worked throughout the year and earned more than £113 per week (Lower Earnings Limit) and were credited with NI contributions
- you received NI credits because of a qualifying benefit (such a carers allowance or child benefit for a child under 12)
- you were a man close to pension age who receives automatic credits for being above the state pension age for women for the whole year.
Find out how much state pension you could get by using the government’s check your state pension tool.
Why would I have a contribution gap?
There are many reasons you might have gaps in your contribution record.
For example, if you were self-employed or worked abroad for part of your career or were employed on low earnings, there might be a shortfall.
You can usually make this up within six years, though there are some exceptions depending on your age.
How much will topping up cost me?
If you were born before 6 April 1951 (men) or 6 April 1953 (women), each week you retrospectively contribute will cost you £14.65 – up to £761.80 for a full year.
If you were born after these dates, different rates apply depending on which year you’re contributing for.
- To find out more about how much voluntary contributions cost, check out our guide on topping up your state pension.
How much is the state pension?
While the basic state pension is £125.95 in 2018/19 for people who reached the state pension age before 6 April 2016, how much you’ll get depends on a series of factors.
For example, you may have built up additional state pension based on earnings across your career.
In April 2016, the basic and additional state pension rules were replaced by one ‘full level’ pension, which currently stands at £164.35 a week.
- Get your head around how pensions work in our full state pension guide.