How to plug your State Pension shortfall
From 6 April, the new flat rate State Pension came into force, replacing the previous two tier system.
All men born on or after 6 April 1951 and all women born on or after 6 April 1953 who reached retirement on or after 6 April 2016 qualify for the new State Pension.
If you were born before these dates, you’ll receive your State Pension under the old or Basic State Pension scheme (see below for more on this).
The full amount available under the new State Pension (NSP) is £155.65 per week but not everyone will get this as it depends on whether you’ve paid full rate National Insurance Contributions (NIC) for 35 years (or been entitled to NI credits).
To get anything at all, you need a minimum of 10 years’ worth of contributions.
If you are approaching retirement and don’t qualify for the full weekly amount, Kate Smith, head of pensions at Aegon, says there are various ways to plug your shortfall. Here, she shares her top tips to maximise how much income you’ll receive.
Pay extra National Insurance Contributions
If you’re concerned you may not get the full State Pension, the first thing you should do is check your NI contribution record to see if you have any gaps.
You can also ask for a pension statement online (or call the government’s Future Pension Centre on 0345 3000 168) which sets out your entitlement and any deductions in respect of periods of paying reduced NI contributions.
If you have a shortfall, you may want to consider paying voluntary NIC to achieve at least a minimum of 10 qualifying years, or to maximise the amount you’ll receive.
However, not everyone will benefit from this as it very much depends on your individual circumstances and contribution history, according to the Future Pension Centre. You may find that actually paying increased contributions won’t make any or just a small difference, so it urges those approaching retirement to get in touch.
Generally, if you do want to pay voluntary NICs, you need to do this before you reach State Pension age too, but once again, it’s best to see a copy of your record and get your pension statement to see if there’s anything you can do. It may also be worthwhile getting professional advice, adds Smith.
You can usually only pay voluntary class 2 contributions (for the self-employed) or class 3 to cover gaps in the previous six years, though it may be possible to go back to 2006 in some cases, depending on your age, and the cost will also depend on the year you’re buying.
For example, the rate for a class 2 contribution in 2016/17 is £2.80 per week, and it was £2.80 per week in 2015/16 but £2.75 per week for 2014/15. A class 3 contribution is £14.10 per week now and in 2015/16, but it was £13.90 per week in 2014/15.
Voluntary NI payments can be made via lump sums or regular payments and you can only pay them if you had been eligible to pay NI contributions for the time covered.
Women who paid the married women’s stamp until it was scrapped in 1977 (a reduced rate of National Insurance) cannot replace any missing years where they have paid reduced NI for the whole year, and people who already have 35 years of NI contributions can’t buy additional years.
Is it worth buying additional years of NI?
Smith says it depends on a number of factors, including your health and potential lifespan, whether you can afford to give up some of your cash now to buy additional years, and whether the extra pension will push you over a new tax band if for example you have other sources of income.
“It may be worth buying additional years’ contributions if you have fewer than 10 years of national insurance contributions to gain entitlement to some State Pension. But everyone’s financial and personal circumstances are unique and it’s worthwhile getting advice,” she adds.
Other ways to increase your new State Pension
Defer claiming: The longer you hold off claiming the State Pension (it must be at least nine weeks), the more the government will reward you by increasing the amount you get. The minimum you can defer for is nine weeks, for the new State Pension.
Holding back from claiming the new State Pension for a year (based on the maximum £155.65 per week) will increase it by 5.8% (£8.99) to £164.64 per week.
Holding off for five years can mean an extra £44.97 per week, meaning you’ll receive £200.62 per week – a 28.9% increase.
Unfortunately deferring your new State Pension isn’t as attractive as it was for those who retired under the old system (10.4% increase in the first year or 52% if you deferred by five years). The old system also allowed you to increase the amount by 1% for every five weeks you defer, rather than the nine weeks now needed.
I’m under the old/Basic State Pension scheme, can I top up?
If you reached your State Pension Age before 6 April 2016, you also have the opportunity to top up your Basic State Pension (BSP).
You can top it up by between £1 and £25 per week (maximum £1,300 a year) by paying voluntary Class 3A NI payments. Again, the cost will depend on the amount you buy and your age. The more you buy and the younger you are, the more expensive it is and an important point to note is that you need to do this before 5 April 2017.
In return for a lump sum, retirees will get an increase in their own BSP, and their spouse’s pension. Smith says one thing to be aware of is that the topped up pension is only increased in line with consumer price inflation (CPI), not by the government’s triple lock guarantee (the greater of increases in price inflation, earnings inflation or 2.5% a year) which applies to the BSP and NSP.
Is it worth topping up your Basic State Pension?
Smith says the terms are quite generous for a joint life inflation-linked pension. “But whether it’s worth topping up your BSP will depend on your health and lifespan, the health and lifespan of your spouse, the rate of income tax you pay and whether it pushes you over a higher tax band as well as what else you could have done with the money.”