If you’re looking to maximise your income in retirement, your State Pension could provide the easiest place to start.
The full state pension for new claimant is a less than generous, but still very worthwhile £164.35 per week. It may not be enough for most people to live on, but it can provide a very worthwhile boost to the income that may be received from a personal pension or company scheme.
The problem is that you might not receive it all.
Many people who have checked their state pension forecast, using the government’s online service have found their weekly figure is below the full £164.35.
The problem is that they did not make the full 35 years of NI contributions. This is often because they ‘contracted out’ of paying additional state pension top-ups and under-paid NI during their working lives.
If you check what the Government is planning on paying you and find that you are not are not getting the full amount or are not on track for it, there is a solution. You may be able to pay voluntary contributions (NI contributions) to boost the amount you get, even if you’ve already retired. The returns you could get for a relatively modest top up can be good, as you are effectively being subsidised by the Government.
If you qualify for the new state pension (which you will do simply by retiring after 5th April 2016) — you could get more by filling gaps in your National Insurance record.
But you may need to move quickly. Currently, it is possible to fill gaps in a National Insurance record at favourable rates, but the rules are set to change from 5th April when the new tax year comes in and the concessionary rates expire. After then, it could cost hundreds of pounds more to try to fill in the same gaps in your NI contributions record.
You could save as much as £153 a year by topping up your state pension now, compared with rather than waiting until the new tax year, when the cost for each missing year of contribution increases substantially.
Paying Class 3 voluntary National Insurance contributions for the tax years 2006 to 2016 could be a good investment. Top up a year’s contributions and it will give you an extra £240 a year on your state pension. Do it now, and you’ll pay as little as £626.60. Do it after April 5th, and the same extra benefit could cost you as much as £780.
Just what you will need to pay will depend on the years you have missed. In the tax years covering 2006-2010, you’ll pay £689.
The cost in the subsequent six tax years is detailed:
- April 2010 = £626.60
- 2011/12 = £655.20
- 2012/13 = £689
- 2013/14 = £704.60
- 2014/15 = £722.80
- 2015/16 = £733.20
How to work out if you should top up
Whether voluntary contributions will boost your state pension will depend on your circumstances.
Your final state pension depends on some calculations. You need to look at how much you would have got under the old rules on 30 years of contributions, plus any state earnings related pension. Compare it with what you would get under the new rules, taking into account the deductions for any years you did not pay into the scheme. You get whichever is the higher.
If the figure is more than the full flat pension, any contributions could be a waste of money.
You may wish to seek independent financial advice before topping up. At Continuum we would be pleased to provide it.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
moneyadviceservice.org.uk – Ways to boost your pension in the run-up to retirement
gov.uk – check your National Insurance record
gov.uk – Voluntary National Insurance
tax.service.gov.uk – Check your State Pension