Have you checked your State Pension Forecast?
An opportunity to optimise
Most advice in relation to pensions is about employer schemes or personal pensions, however an often overlooked, or at least not thought about, part of pension planning is your state pension. You should ensure you are making the most of it.
As I mentioned in a recent newsletter, there’s an opportunity to make voluntary National Insurance contributions to boost your State Pension. In my research into this it quickly became apparent that it’s not as simple as it first sounds and may affect many people. If you are not sure, do read this article and contact us to help you navigate through the complex web of regulation.
First, some background to the state pension
On 6 April 2016 the State Pension changed for men born after 6 April 1951 and women born after 6 April 1952. The previous rules were complicated because there were different elements to the pension and it made a difference whether you were “contracted in” or “contracted out” in relation to the old State Pension(s).
“Contracted out” applies to where you were in an employer final or average salary pension scheme, which meant you paid reduced rates of National Insurance for the time you were in such schemes. If you have worked in the public sector before 6 April 2016, you would have been most likely contracted out. You could also have opted to contract out and had National Insurance contributions paid into a personal or stakeholder pension.
The basic principle is that you need to have 35 qualifying years to receive the full new State Pension:
- For the years of contributions before 6 April 2016 a calculation is made to calculate your “starting amount”. This amount is the higher of:
- the amount you would have received under the old State Pension rules, and
- the amount you would get if the new State Pension had been in place at the time you started working.
- There could be a deduction on these figures if you were contracted out prior to this date. Although, depending on your remaining working years you could make up for these “missing” years.
- Each qualifying year on your National Insurance records from 6 April 2016 adds £5.82 per week to your new State Pension.
- The exact amount you get is calculated by dividing £203.85 (the current full pension) by 35 and then multiplying by the number of qualifying years.
- Confusingly, when you check your National Insurance record it tells you how many full years of contributions, but not if there are “contracted out” years which may not count as qualifying years.
- Equally confusing, the amount of National Insurance contributions recorded for that year makes no difference to whether it is a qualifying year. In recent years it has been commonplace to have a very low director’s salary with no National Insurance contribution, yet because the salary was above the lower earnings limit (currently £123 per week) it still qualifies.
- If you have been self-employed (sole trader or partner of a partnership), as long as you paid Class 2 National Insurance the year will qualify.
Missing years
You could have missing years i.e. gaps in your National Insurance records for one of the following reasons:
- Living abroad
- Working but with low earnings (for 2023/24 less than £123 per week)
- Not working or claiming benefits
- Self-employed but not paying National Insurance contributions because of small earnings exemptions.
If you were not working but were claiming benefits, including Child Benefit for a child under 12 (or under 16 before 2010) then you may have been getting National Insurance credits and therefore not have a gap.
Important – if it is possible that any of the above applies to you, especially if the relevant years are since 2006, then you should check your State Pension Forecast.
Where to start
1. Check your State Pension forecast – GOV.UK
To use this service, you’ll need to prove your identity using your Government Gateway. It will ask you to register for Government Gateway if you have not used it before.
2. Once you have your forecast you will know whether you have gaps in your National Insurance records and whether there are sufficient working years ahead for you to achieve 35 qualifying years.
If there are not, you might be able to make voluntary contributions to add additional years to your new State Pension. Even this can be complicated, so it is advisable to contact the Future Pension Centre to confirm what you are able to add. Until 5 April 2025 there’s an opportunity to add years as far back as 2006 at the current voluntary rate (£17.45 per week), or the previous 2 tax years at the original rates for those years, or even the Class 2 National Insurance rate for the previous tax year.
3. You will have to assess whether it is worth adding any additional years. As a very rough rule of thumb. The cost of adding a year is likely to be repaid to you by receiving your State Pension for 3 to 5 years.
With the deadline extended to 5 April 2025 there is a temptation to put it on the “too difficult” pile and “do it later”. There’s a huge amount to understand and time is limited for making the earlier year voluntary National Insurance Contributions. So I urge you to obtain your pension forecast today and check your National Insurance record to assess your situation.
I would be very happy to answer any questions you have about this. Please feel free to contact me to see if you could benefit: ian@isaccountancy.co.uk
Navigate your State Pension Forecast
There are many factors to consider when checking your State Pension Forecast, so we’ve created this flowchart to guide you through as a starting point.