For most retirees, the State Pension forms the foundation block of retirement income. Anyone reaching State Pension age after 6th April 2016 with full entitlement, currently receives a guaranteed income of £185.15 per week (£9,627.80 per annum). Furthermore, so long as the “triple lock” guarantee is maintained, this income should increase each year by the higher of:
- National average earnings
- Inflation, as measured by the Consumer Prices Index (CPI), or
- 2.5%
In the current high inflationary and uncertain market environment, this guaranteed, index-linked income is an invaluable benefit, even for those with large private pensions, or with a separate investment or property portfolios.
Eligibility
To qualify for a full State Pension, you will need a complete National Insurance record of 35 years. A minimum of 10 qualifying years is required to be entitled to any amount.
It is advisable to regularly check your state pension entitlement as you approach your state retirement age. Obtaining a state pension forecast is relatively straightforward and can be requested at the government website shown below. Initially it is necessary to apply for a Government Gateway ID, if you do not already have one, but this is only required when requesting a forecast for the first time:
www.gov.uk/check-state-pension
Alternatively, you can request a state pension forecast by calling The Pension Service on 0800 731 0175. You should have your NI number to hand.
The forecast advises what State Pension has accumulated to date and, importantly, what additional NI contributions will be required to receive the full entitlement.
National Insurance record
If you already have a full entitlement, or you are predicted to reach full entitlement by the time you reach state pension age, then no further action is likely to be required. However, in certain instances a shortfall may be expected. Most commonly this would be due to:
- Living abroad.
- A period of part time employment on a low income.
- A gap in employment.
- Working on a self employed basis with a low income.
Where a shortfall is predicted, it is first important to check that you are not entitled to NI credits which have not been applied to your NI record.
National Insurance Credits
The most common reason for receiving NI credits is childcare.
Where a parent has registered for Child Benefit for a child under the age of 12, NI credits are received automatically. As Child Benefit is now means tested there is a temptation to not claim the benefit where a parent has income of over £50,000 – £60,000 per annum. However, due to the NI credit it is important to register for Child Benefit, even if it isn’t claimed.
One little known option is that, since April 2011, it has been possible for grandparents or other family members to receive NI credits if they are caring for a child under 12 while their parent (or main carer) is working. This can be invaluable for grandparents providing informal childcare, but where they would otherwise have a shortfall in NI contributions.
You can check your NI record, at the following government website:
www.gov.uk/check-national-insurance-record
Making voluntary contributions
Where a shortfall in NI contributions is identified, it is possible to pay voluntary contributions to fill gaps in your NI record.
Usually, it is only possible to pay for gaps in NI record for the previous six years. However, men born after 5th April 1951 and women born after 5th April 1953 have until 5th April 2023 to pay for any eligible gaps between the tax years April 2006 and April 2016. This effectively creates a window of 16 years. After 5th April 2023, this will revert to the usual six-year period.
The cost of filling gaps in your NI record will depend upon your circumstances. For example, whether you paid NI for part of a tax year but have a shortfall to make up, or whether you are paying for a tax year where no NI contributions were made.
Is making voluntary contributions good value for money?
Making voluntary contributions to fill gaps in your NI record is extremely good value for money. Typically, it costs £824 to purchase a full year of NI contributions (although it could be less) and this provides you with an additional £275 of state pension income each year. Remember that this is payable from state pension age for the remainder of your life and will increase each year in payment.
That means that you would only need to live 3 years beyond state pension age for you to be better off. Typical life expectancy in retirement (85 for men and 87 for women) would mean you are thousands of pounds better off.
One note of cautious when purchasing NI contributions – you receive no benefit for exceeding 35 years of qualifying NI contributions. If you purchase NI contributions in excess of 35 years (by the time you reach state pension age) this is effectively wasted money.
When is my state pension age?
State pension age is currently 66 for both men and women, although it is scheduled to gradually increase to 67 between 2026 and 2028. Those born after 6th April 1960 will have a state pension age after their 66th birthday. The state pension age will rise again to 68 between 2044 and 2046, although there is a proposal to bring this forward to between 2037 – 2039.
You can check your state pension age at the following website:
www.gov.uk/state-pension-age
Summary
The state pension is a valuable benefit for almost all retirees, but it is important that you consider your state pension in advance of retirement by obtaining a state pension forecast. This allows you to better plan your retirement by helping you understand the income you are due to receive but also to identify any gaps in your NI record, which could potentially be filled before retirement.
Please note that this article is based upon our current understanding of the new state pension. It is intended for information only and is not an individual recommendation.
Sources
www.gov.uk
www.ons.gov.uk (Office National Statistics)
Fidelity
