Boost your pension by 27%

Want to give your pension income a massive boost without it costing you a fortune? Chris Torney explains how.

The Government is offering thousands of people a terrific chance to boost their incomes in retirement.

The returns available are as high as 27% a year - more than five times the best savings rates at the moment, and almost ten times the inflation rate.

What is happening?

This offer is on the table because of changes ministers are making to the UK’s state pension system.

Basically, it involves giving people who have spent several years out of the workforce - bringing up a family, for example, or caring for older relatives - the chance to boost the amount of state pension they receive by making up some of their missing National Insurance contributions (NICs).

When people reach the state retirement age - 65 for men and, currently, 60 for women - the amount of state pension they get is based on how many full years’ NICs they have made.

The full state pension at the moment is £95.25 a week per individual, rising to £97.65 from next month. But not everyone gets this much.

To qualify for this full weekly payment, men have until now been required to accrue 44 years of NICs and women 39 years by the time they reach retirement age. From April 6 this will be cut to 30 years for both men and women.

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What’s the deal?

Anyone is allowed to buy a year’s worth of missed NICs for the most recent six years, provided they have already accrued at least 20 years’ worth of NICs.

This means paying a lump sum now in return for larger state pension payments from the time you retire until you die.

You can do this even if you have already reached the state retirement age.

Using current figures, buying a year’s NICs costs £626.60, and for someone retiring in the 2010-11 tax year (beginning April 6) this would generate an additional 1/30th of the full basic state pension. This is £169.26 a year, based on the 2010-11 weekly pension of £97.65.

That’s the same as buying an annuity for £626.60 which paid out £169.26 a year for the rest of your life this is a fantastic return of 27%. In today’s depressed annuity market, you would be lucky to get more than £30 a year (a return of 4.7%) for the same initial sum.

Related how-to guide

Get ready to retire

There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.

See the guide

Extra opportunity

The Government has extended the right to buy back NICs for those who have recently retired or who are due to do so in the next few years.

For women who were born between April 1948 and October 1952, and for men born between April 1943 and April 1950, there is also the option of buying back a further six years’ worth of NICs, dating back to April 1975. This would give a total of 12 years’ extra contributions.

Should I take advantage?

Whether buying back years of NICs is a sound financial decision really depends on how far you are away from the state retirement age.

There is no point buying missed NICs if you are likely to reach the new 30-year contribution target during the rest of your working life.

Equally, if you have not yet hit the 20-year minimum requirement, buying extra years is not an option.

For anyone set to retire in the next few years, the calculations should be fairly straightforward and, as we explain below, you can get help from the Government to help you make up your mind.

As the example above illustrates, the returns from buying back NICs are, at the moment, considerably higher than those available to savers or those buying an annuity.

However, bear in mind that under present rules, those on low incomes in retirement are entitled to the pension credit top-up, which ensures that everyone gets an income of at least £130 a week, irrespective of their National Insurance record.

If you are likely to be entitled to pension credit, buying back extra years’ NICs may be unnecessary and a waste of money.

The next steps

You can find more information at the Government website DirectGov. It is probably also a good idea to ask for a state pension forecast from the Pensions Service using this link or by calling 08456 060 265.

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