National Insurance gaps: How to pick the best years to boost your pension
As part of the biggest shake-up to pensions in a century, the new state pension or flat rate state pension came into effect on 6 April 2016.
Anyone retiring from this date – men born on or after 6 April 1951/women born on or after 6 April 1953 – needs at least 10 years of National Insurance contributions (NICs) to qualify, and 35 qualifying years to receive the full amount. Those with less than 10 years of contributions will not receive any state pension at all.
The current rate is £185.15 per week so if you’re forecast to receive below this amount – see the government’s Check your state pension forecast – you can plug your NICs gap by making voluntary payments to boost your pension.
But there are three things you need to know first before making the move:
1) Cheaper and/or partial years
Based on buying Class 3 NICs for 2022/23, it costs £15.85 per week so it would cost £824.20 to buy a year. This would mean a gain of £5.29 per week or £275.08 over the year. As such, it would take just under three years of receiving the state pension to recoup the cost.
However, as you pay Class 3 NICs for the year in question, the rate changes marginally from year to year. This year it is £15.85 per week, last year it was £15.40 while in 2020/21 it was £15.30 and in 2019/20 it was £15.
According to Louise Rycroft, financial consultant at independent financial advisers, Timothy James and Partners, it is also cheaper to top-up partial years rather than buying a full unused year.
She says: “If there are previous years where you have paid some NI contributions or received NI credits but not enough to qualify for a full year, you may be able to pay voluntary contributions sufficient to top-up that year. In this scenario, it can cost less to top-up a partial year rather than buying a full new year.”
You can see the differing National Insurance amounts on the government’s website.
You may have received National Insurance credits if you were not paying NI, such as if you were claiming benefits because of ill health or being unemployed. Examples include those who were in receipt of statutory maternity or paternity pay, statutory sick pay or you may have qualified for jobseeker’s allowance but never claimed it.
2) Consider plugging any gaps before April 2023
Under the government’s ‘transitional arrangements’ as part of the new state pension scheme, it currently allows you to plug any NICs gaps dating back to 2006. However, from 6 April 2023, this will be limited to just the last six tax years so you won’t be able to buy up NICs from earlier tax years.
As such, it’s best to check your National Insurance record as soon as you can to see what’s missing and how you can plug any gaps as cheaply as possible.
3) Check you’re not paying for nothing
Most people will be better off in the long-term if they can top-up their state pensions to the maximum, according to Rycroft. But she warns that for some, there may not be any benefit in doing so.
She says: “Once you have built up 35 years of qualifying NICs you cannot improve your state pension under the new scheme further. However, if you are buying additional years online it may allow you to buy additional missing years that you do not need.”
There’s also a warning on the government site that “voluntary contributions do not always increase your state pension”.
She adds: “Once you have accrued 35 years of qualifying years of NICs, if you continue to work you will continue to pay NI, therefore the timing of topping up your state pension is important to avoid overpaying where possible. An Independent Financial Adviser can help you navigate this within your wider planning.”
Rycroft says that while there are various calculators online which can guide you on the entitlement you have built up so far, and any missing years you can potentially buy, “it is very important to use the state pension helpline before paying for any contributions”.
“They should be able to guide you on the best years for you to buy to maximise your state pension in the most effective way”, she adds.
You can contact the Future Pension Centre helpline on 0800 731 0175.