Are you eligible for a special scheme designed to help you boost your state pension by making voluntary national insurance contributions? Find out here...
National Insurance (NI) contributions are essentially (though not practically) the government-held pot that your State Pension comes out of when you retire. You get one year of NI contributions for each year you work or claim benefits such as Income Support, Disability Living Allowance and Child Benefit (these were known as Home Responsibilities Protection prior to April 2010).
Voluntary contributions allow you to top up your NI contribution pot by buying back years of NI that you may have missed by not working or claiming the appropriate benefits. The increase in contributions will improve the amount you receive in your State Pension. This is a great way for people who haven’t built up enough NI contributions to receive the full State Pension to give their retirement pot a well-needed boost.
Normally you’re only allowed to buy back NI contributions missed in the previous six years, but under this special scheme you can buy back a further six years of contributions out of any that you may have missed since 1975.
What’s more if you make your voluntary contribution by April 5th 2011 the government will treat this as if it had been made prior to you reaching State Pension age and you’ll receive an additional payment back-dated to your eligible age that includes this extra pension boost.
Complicated stuff, I know! So let’s take a closer look...
What is it?
This scheme is an attempt by the government to paper over the cracks formed by the change in the number of qualifying years of NI contributions or credits needed to be eligible for a full State Pension (currently £97.65 per week).
This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.
As it stands, if you’re male and born before 6th April 1945 you’ll need 44 qualifying years to be eligible for a full State Pension. For women born before 6th April 1950 you’ll need 39 qualifying years. If you’re born after these dates you’ll need a straight 30 qualifying years – whether you’re male or female.
This voluntary contribution scheme is aimed at anyone who has reached their State Pension age since 6th April 2008. You may still be working or be receiving an incomplete State Pension due to lack of qualifying years – either way this scheme could boost your weekly retirement income.
How much does it cost?
Each year of contributions you want to buy back before the end of 2010/11 financial year will cost you £12.05 per week, or £626.60 per year. So if you chose to use all of the extra six years on offer, you’d have to fork out £3,759.
The government estimates that for every year of NI contributions you buy back will boost your State Pension by between 2% and 5% of the full amount if you reached State Pension age prior to April 6th 2010.That’s a maximum possible amount of around £4.85 extra per week. So if you use all six years of extra voluntary contribution allowance you could see your pension pot jump by anything between £608 and £1,513.
If you reached State Pension age after April 6th 2010 (find out your State Pension age using this calculator) then the qualifying age and Home Responsibilities Protection reforms will see your pension boosted by a standard £169.26 a year (one 30th of the current annual pension payment) for the rest of your life in return for a one-off payment of £626.60.
Yes, you won’t see a direct return on your investment for a few years. But if you’re planning on living well into your 70s, these extra contributions will almost certainly see you end up better off.
And that’s not all...
Backdated payments
Back in 2008 we reported on the initial incarnation of this scheme in Boost your pension by £960 a year. Most basic principles of the scheme have remained the same – but the government has added in one further clause that could allow you to claim an additional payment.
If you reached your State Pension age after April 6th 2008 and make your voluntary contribution before April 5th 2011 (14 days time!) then the government will treat the payment as if you had made it prior to reaching your State Pension age. So your new boosted pension rate will stretch right back to the date you became eligible to claim the State Pension and you’ll be paid an additional sum that will retrospectively increase the pension payments you have already received.
Find out why it’s crucial to keep your pension contributions up even when money is tight
For example if you reached the state pension age on 6th April 2010 with 24 qualifying years of NI contributions and bought six years of voluntary contributions your pension rate would increase from £78.12 a week to the full amount, £97.65. In addition to this you would receive a backdated payment increasing your previous 52 pension payments to the full rate. This figure would be the difference between the two rates multiplied by 52, which in this example would work out at £1,015.56.
But it is worth pointing out that if you’ve been receiving Pension Credit then this will affect the backdated payment you receive.
Who is eligible?
To be eligible for the backdated payment you must have reached State Pension age since April 6th 2008 and make the voluntary contribution before April 5th 2011. You are still able to make six extra voluntary contributions after this point as long as you will reach State Pension age by 5th April 2015 – but you won’t be eligible for the backdated payment.
If you’re eligible for your State Pension but have not claimed it then you can still utilise this scheme. Any voluntary contributions made before April 6th 2011 will be backdated to the day you reached your State Pension age and included in your payments when you do eventually start receiving your pension.
To be eligible for any of these schemes you must have at least 20 qualifying years of NI contributions or Home Responsibilities Protections (child benefit etc). If you reached State Pension age between 6th April 2008 and 5th April 2010 you must also have at least one qualifying year of paid contributions from employment.
It’s also not possible to make voluntary contributions towards any year where you paid the reduced married woman or widow's rate of NI.
Is it for me?
It’s important to consider carefully whether voluntary contributions really are for you. As the State Pension is taxable any increase may push you into a higher tax bracket – and actually see you take home less. A pension boost may also knock out or reduce other income-related benefits such as housing or council tax benefit.
You should also think about your life expectancy, the date you reach State Pension age and the number of qualifying years you already have when deciding whether to make a voluntary contribution. It’s also worth checking if you can use NI contributions from a late or former spouse or civil partner; as this could be a cheap way of boosting your pension pot.
And you can find more pension tips by heading to Top 25 ways to boost your pension!
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