Poster Place
The following article was published in the Telegraph in the fall of 2006 and is reproduced here with kind permission.
For
many of the 12m people with a broken work record, making up missed
National Insurance contributions could be the best financial decision
they ever take. John Greenwood does the sums Millions
of mothers, part-time employees and people who have worked abroad are
missing out on the best value pension on the market by not buying back
state pension credits. Some
12m people, the majority of them women, are on course to retire without
a full basic state pension because they have broken work records. But
for just £7.55 a week, roughly the cost of a packet of nappies or a
couple of glasses of wine, anyone who does not pay National Insurance
Contributions (NICs) can buy a pension worth more than £125,000. That
is the pension pot a woman aged 60 would need to buy an annuity to
match the inflation-linked income she would get from a full basic state
pension, which is currently £84.25 a week. If you
have a broken work record, the chances are that you will have received
a letter from HM Revenue & Customs reminding you of your right to
buy extra entitlement through "Class 3 National Insurance
contributions". What that letter will not tell you is what a fantastic
deal you are being offered. Buying back missed
years of basic state pension entitlement is staggeringly good value,
provided you do not expect to be relying on benefits for the majority
of your retirement income, which is probably why the Government does so
little to advertise it. The
Revenue says less than one person in 20 takes up their right to buy
back state pension entitlement, which means that a massive number of
people with broken work records are missing out. Experts
say filling gaps in your National Insurance contribution record with
Class 3 contributions, also known as "voluntary contributions", is the
first priority for anyone who is not on course to retire with a full
basic state pension, particularly for those nearing retirement, who
save most by buying back earlier years' contributions. "Making
voluntary contributions is a no-brainer if you haven't built up enough
to get a full state pension when you retire," says Michelle Cracknell
of Origen, the independent financial adviser. "Whether
it is women who have had career breaks for children or anybody who has
worked overseas for a considerable period, buying back years is the
most cost-effective form of pension saving you can make." It
costs just £7.55 a week to buy back the basic state pension
entitlement, which adds up to £392.60 a year. If a woman paid an
equivalent amount into a private pension for the 39 years it would take
her to get the full entitlement, she would build up a pot of just
£57,264, assuming annual growth of 5 per cent a year on her fund and
tax relief of 22 per cent. This is less than half the £125,000 she
would need to buy an equivalent income privately through an annuity.
Put another way, she needs only to live to just under 64 to be better
off. "Most people think £84 a week or £4,400 a year
is nothing, but they don't realise how much money they need to get this
income when they are retired," says Billy Burrows of William Burrows
Annuities. And buying back state pension rights is
set to get even cheaper for anyone under the age of 60 on April 6 2010
because the Government is planning to reduce the qualifying period for
a full pension from 39 to 30 years for women and from 44 to 30 years
for men. A woman under the age of 56 today who is
saving in a private pension rather than buying back missing state
pension credits would see her pot grow to a meagre £35,019 in the 30
years she could have been buying her state pension worth £125,000. While
making claiming back extra years even more valuable than it already is,
the new rules, which are expected to go through Parliament before
April, also mean fewer people will need to claim extra years to get the
full state pension. Last month the Revenue issued a
warning that anyone who is currently making voluntary contributions and
is on course to retire with more than 30 years' credits may want to
stop paying into the state system because it will not make them any
better off. You can claim back voluntary
contributions for gaps in your National Insurance payments going back
as far as 1996, although from 2009 you will be allowed to backdate only
six years. If you have already reached state pension age and find you
are not entitled to a full basic state pension, you are still allowed
to buy back credits as far back as 1996 although you cannot buy them
back for the year of your retirement. Parents with
children under 16 and people who care for disabled or elderly friends
or relatives for more than 35 hours a week get help towards their state
pension through Home Responsibilities Protection, but this does not
fill in missed years of basic state pension; it simply reduces the
number of years someone needs to contribute to get a full state pension. But
the basic state pension does not pay out at all if you do not have a
minimum 25 per cent of the contributions you need for a full pension.
This means that even though Home Responsibilities Protection could
reduce the number of years you need to qualify for full pension to
perhaps 20 years, if you do not have five years' contributions you
still get nothing. This can mean that many women
who do not work because they are looking after children or are stuck in
part-time jobs below the National Insurance threshold can end up with
no basic state pension at all. Married people who
have not worked throughout their working life can opt to be treated for
state pension on their spouse's contribution and will receive 60 per
cent of their entitlement. Alternatively, they can buy extra years if
they think this will take them above the 60 per cent pension they would
get through their spouse. Where both spouses have a full contribution
record, both receive the full pension of £84.25p a week. The
Government's pensions White Paper proposes changing this complex system
to make it fairer to non-working parents and other carers. Changes are
set to take effect in 2010 and a lot of people will no longer need to
make voluntary contributions. But despite this, millions of people,
whether they reach 60 before then or not, could be missing the bargain
of a lifetime by not buying back those years they have missed out of
the National Insurance system. The key questions about extra contributions How do I know whether I should claim or not? You need to get a pension forecast by completing form BR19 at the Pension Service website www.pensionservice.gov.uk.
Alternatively, you can seek advice by telephoning the HM Revenue &
Customs National Insurance inquiry line on 0845 302 1479 or by
contacting the State Pension Forecasting Team inquiry line on 0845 3000 168.
You can then calculate whether you will have enough years'
contributions by the time you retire. How many years' contributions do I need to get the full basic state pension?
Women currently need 39 years and men need 44 years. However, from 2010
this is expected to be reduced to 30 years for both sexes. This means
anyone born after April 5 1950 will need only 30 years' contributions
for a full pension. Why do men have to pay more than women? This
is because the retirement age for women is currently 60 (but it will
rise to 65 by 2015). If you are a man aged between 60 and 65 and you
are not paying contributions on earnings because, for example, you have
taken early retirement, you will get NI credits. Are there any other benefits of paying National Insurance contributions?
Your spouse will get a bereavement payment in the form of an immediate
tax-free lump sum payment of £2,000 if he or she is widowed before you
draw the state pension. How are voluntary contributions paid? You
can pay by cheque direct to HR Revenue & Customs for previous
years. You can pay for the current tax year by direct debit. Will anyone lose out by buying extra years? Some
people on very low incomes will lose out because their means-tested
benefits will be reduced. Buying extra years is less beneficial for
younger people because the money they pay into the system would grow
for longer if it was invested rather than put into the state pension.
The above article is reproduced with kind permission of Telegraph Media
Group Limited
The pension bargain
10 June 2006: Time for women to build up their pot 25 May 2006[News]: Women 'miss out on new pensions' 22 May 2006[News]: Firms 'must pay extra £2.6 bn' for new national pensions