Don't Put Your State Pension At Risk

If you haven't paid sufficient national insurance contributions (NICs) during your working life you run the risk of jeopardising your State pension. Here's how to make up a shortfall.

It's around this time of year that HM Revenue & Customs (HMRC) contacts anyone who has hasn't paid enough national insurance contributions (NICs) for the tax year concerned to be counted as `qualifying'. Don't be alarmed if this applies to you. Here I'll outline what you need to do to get your NI record back on track.

First of all, if you've received a letter like this it isn't a demand for payment. You're not obliged to make up the shortfall in your NI record. It's simply making you aware that insufficient contributions were paid or credits were awarded for the tax year in question which could affect your entitlement to the basic State pension and other benefits when you reach retirement age.

This also gives you the opportunity to tell HMRC if you think there's an error on your record. HMRC carry out this exercise every year so this may not be the first you have been contacted.

If you think your record is inaccurate -- perhaps you know you were in full-time employment for a period over which no NICs have been recorded -- then you should contact HMRC as soon as you can. It's possible your contributions haven't been recorded correctly or perhaps your employer has deducted your NICs but not yet sent them to the revenue.

For a full entitlement to the basic State pension men need 44 qualifying years where enough NICs were paid by the time they reach 65. The situation is more complicated for women. Women who reach 60 before 2010 need 39 qualifying years. Recent legislation means that people who reach State pension age on on or after 6 April 2010 will only need 30 qualifying years.

If you don't have enough qualifying years, you may still get a percentage of the full basic State Pension depending on how many you have. To get the minimum basic State Pension (25%) you normally need at least 10 or 11 qualifying years.

Assuming the shortfall is accurate, you should have been notified how much you will need to pay in voluntary contributions if you wish to make the tax year qualify so that you are entitled to the full basic State pension and Bereavement Benefit.

Class 3 Voluntary Contributions

If there are gaps in your NI record you can choose to make them up, if you wish, by paying Class 3 Voluntary Contributions. These are flat rate contributions which can be paid by you to guarantee you have sufficient NICs. The flat rate for the 2007-08 tax year is £7.80 per week (£7.55 per week for 2006-07 tax year).

You will be able to pay Class 3 NI if:

• You aren't working;
• You aren't liable to pay Class 1 and/or Class 2 contributions as an employed or self-employed person;
• You haven't paid or been treated as having paid or been credited with sufficient Class 1 or Class 2 contributions in the tax year for it to qualify;
• You're exempt from Class 2 NI as a self-employed person;
• You're living abroad and wish to maintain your entitlement to various benefits including the State pension.

You can also make back dated Class 3 NI payments for previous years but you must pay before the end of the sixth tax year following the year in which they were due. Unfortunately, any payments made later than this won't count.  

National Insurance Credits

The purpose of NI credits is to safeguard your NI record and maintain your entitlement to the full basic State pension and other benefits. Here are some of the circumstances where NI credits will be awarded in the place of your NI contributions:

• You're unemployed or sick;
• You're on an approved training course;
• You're doing Jury Service and have earnings at or below the lower earnings limit;
• You're receiving Statutory Maternity Pay, Sick Pay, Adoption Pay, Maternity Allowance, Carer's Allowance or Working Tax Credit.

New legislation this year now allows NI credits to be issued to those raising children under 12 or caring for severely disabled people for over 20 hours per week. These credits can be used to gain qualifying years.

Automatic Credits

You can receive NI credits automatically for up to five tax years as you approach retirement age. To be precise, that's up to five years from the tax year in which you reach 60 if you're a man aged between 60 and 65. If you're a woman born after 5 April 1950 and you're aged between 60 and 65, you're also entitled. That's as long as you lived in the UK for at least 182 days of the tax year. 

You should take automatic credits into consideration if you're thinking of making additional Class 3 voluntary contributions to assess how much you'll need to pay.

Young people will also get automatic credits for the tax years in which they turn 16, 17 and 18 if they don't earn enough to pay or be treated as paying NICs.

So there you have it. A quick guide to protecting your NI record. If you need further information visit http://www.thepensionservice.gov.uk/ and http://www.hmrc.gov.uk/. If you have any queries regarding your contributions, you can also contact HMRC on 0845 915 5996.

More: 12 Tips About Women's Pensions | Pension Credits: What Are They And Are They Any Good?