The UK state pension is a marvellous thing. It isn’t a huge amount of money but it makes sure that those who have paid into it get a baseline of retirement income. Because it is only a baseline, you should do other things towards saving for your retirement as well. That’s for another article. This article will help you maximise your UK state pension. Now this is actually all about future wealth planning, but you can still look at this up to state retirement age (66-68) and work out how to get your hands on your maximum state pension.
Understanding your National Insurance contributions
Currently you need 35 years’ worth of National Insurance contributions to get a full state pension. This used to be 39 years and changed in 2016.
You might be wondering:
- What if you have gaps in your contribution record?
- Maybe you didn’t work for a while?
- What if you were working in a different country?
- What if you had a maternity break?
- Maybe you were employed but didn’t earn enough to pay National Insurance?
- Maybe you are approaching retirement age and still working and don’t need to take your state pension
Well, there are things that you can do that will help you get the maximum state pension.
Checking your NI contribution record
Find out how many years of contributions you have by requesting a copy of your NI contribution record. You can do this through the following:
- This is really easy to do via your online HMRC account. And if you don’t have an online account is easy to set one up. This link is to HMRC’s Check Your National Insurance Record service: Check your National Insurance record online.
- If you don’t like online you can do this by post with form CA3916 (although HMRC makes it hard to get to this form! Request your NI contribution statement by post.
Identifying and addressing gaps
If you have gaps, check them out first. Is this an error that needs to be corrected? Or is the gap a valid one?
Maternity and parental responsibility gaps
Since 1978, you should not have an NI contribution gap due to maternity or parental responsibilities for a child aged under 12. If you do, then get in touch with HMRC national insurance helpline to ensure you are on track for your maximum state pension.
Low earnings or non-payment gaps
If you have a gap in your record because you simply didn’t earn enough (or at all) to pay NI contributions, then you should qualify to pay voluntary contributions or to buy additional years credits. If you ask HMRC they will tell you how many years’ voluntary contributions you need to pay to fill the gaps in your contributions record. Generally, they will ask you to pay the Class 3 voluntary contribution to work towards your maximum state pension.
Why might you have gaps in your contribution record?
HMRC gives 4 causes of gaps and which type of voluntary contribution you can make to deal with this.
- Employed but had low earnings: Class 3 NIC
- Unemployed but didn’t claim benefits: Class 3
- Self-employed but had low earnings: Class 2
- Living or working outside the UK: Could be Class 2 or Class 3, depending on your circumstances
If you are living abroad or you don’t earn enough to pay NI contributions, then you might be able to pay NI contributions to sort out your entitlement to the state pension. You can do this by paying class 2 or class 3 NI contributions. However, it is important to check you are eligible to do this, which means contacting HMRC’s National Insurance helpline
Choosing between Class 2 and Class 3 voluntary NI contributions
Firstly, there is a matter of cost. Class 2 is a lot less than Class 3 NIC. However, you also need to work out which one you are eligible to pay. There is no point in paying only for it to not work!
Importantly, whilst both Class 2 and Class 3 count towards your state pension, they qualify you for different state benefits. Qualifying for state benefits as well as the state pension is a reason why you might want to pay these voluntary contributions.
Do you need to pay voluntary contributions?
Have you got enough working years left in your career so that you will get to the maximum number of contribution years by the time you reach state retirement age, or do you need to pay voluntary contributions?
Is it worth paying for extra years of state pension?
The short answer is yes! The more complicated answer is it depends. Each year that you pay is worth £329.08 per annum (2024 rates) in additional state pension. This means you get your money back after about 3 years of receiving pensions.
How long you live for then becomes important. Live for 10 years after taking your pension and each additional year you have purchased gives you a profit of around 2.3x what it costs you. Obviously, the longer you live, the bigger your benefit.
Deferring your state pension
You can agree with the DWP to defer taking your state pension and claim for it at a future date. What this means is that you defer taking money, but when you do start taking it, you get extra money as part of each pension payment you get. Your pension increases by 1% for every 9 weeks you defer. Defer by a year and get nearly 5.8% extra!
Backdating your state pension
This is different to deferring it. If you are eligible, but just don’t claim it and instead claim your state pension at a future point, then you are backdating your pension. This is paid out to you at the time you make your claim, but is taxed based on when it was due to be paid! -This is paid out as a lump sum.
Securing your maximum state pension
Maximising your state pension means getting to grips with your National Insurance contributions, addressing any gaps, and making choices about deferring or backdating. By doing so, you can ensure you receive the full benefit of the state pension, providing you with greater financial stability in retirement.
Struggling to understand National Insurance Contributions? Need help getting it right, ask for more advice! [email protected]
