Workers are expected to pay a record amount towards their state pension this year before a deadline for changes that could cost them tens of thousands of pounds in retirement.
Time is running out to fill any gaps in National Insurance contributions between 2006 and 2016 to ensure you receive the full state pension, currently £9,628 a year. The deadline for catch-up payments for missing years in this period is April 2023.
Tens of thousands of people top up their pension by making voluntary contributions each year, but consultancy LCP has forecast a surge in payments before next year’s deadline.
A six-year deadline usually applies to fill missed contributions, but a change to the state pension in 2016 resulted in a one-off longer concession to top up contributions missing between the financial years 2006-07 and 2015-16.
The standard cost to make up a year of missing NI contributions is £824.20, although the self-employed pay just £163.80. The top-up can add tens of thousands of pounds to a pensioner’s income throughout retirement.
Sir Steve Webb, a former pensions minister and now at LCP, said: “I regularly hear from people who would be interested in boosting their state pension but are confused about whether they can do so and how to go about it.
“At its best, topping up your state pension can generate a tremendous rate of return, far better than almost any other way to use spare money.”
The full flat-rate state pension is currently £185.15 a week. Someone who has made 25 years of NI contributions rather than the 35 years needed for a full state pension would get £132.25 a week.
However, topping up all the gaps would give an extra £52.90 a week or £2,750 a year, or roughly £55,000 extra in total, over a 20-year retirement.
Brian Moore, 65, was due to receive well short of the full £185.15 a week when he reached state pension age next year. He had been a member of the Local Government Pension Scheme, which had “contracted out” of the state pension, reducing his entitlement.
But by paying a lump sum of £4,000 to fill gaps in his NI record he added £28 a week, or £1,456 a year, to his pension. He was also able to use NI credits earned when he was a carer for his father to fill two years of contributions.
But Sir Steve said there were “many pitfalls” when people boosted their state pension. Some years cost less to top up than others: for example, a year in which someone worked part-time and paid some NI is cheaper to fill than a completely blank year.
LCP has a new calculator on its website to explain the process.
Making voluntary contributions is not suitable for everyone, especially for those who do not plan to retire in the near future.
Andrew Tully of Canada Life, an insurer, said: “Topping up contributions to boost your state pension can be a very good deal, but it is vital you make sure it makes sense for you first. Don’t do it just because you can.
“Think about how many more years you want to work – you can’t get the money back if you overpay and find that you would have made up the contributions through working anyway.”
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