Is it worth filling the gaps in your State Pension for retirement? The ‘Should I pay my State Pension missing years’ question is a common one, and answered clearly right here.
If you’re nearing retirement, or you’re in the process of planning for retirement, you have probably thought about your State Pension.
Now, on its own, the State Pension won’t pay for much more than the basics; but it’s a great safety net, and you’ll want to get as much from it as you can.
The problem is that navigating your State Pension is like finding your way through a maze.
Not only do you need to negotiate long wait times for your calls to be answered by HMRC and the DWP, but you also need to understand how your National Insurance (NI) contributions affect your State Pension entitlement.
It’s actually quite a straightforward formula, as I discovered after a colossal wait for my call to be answered by HMRC.
Here’s what you need to know.
30-Second Summary
Paying the shortfall in your NI contributions could be the best investment you’ve ever made, with guaranteed returns that increase by at least inflation each year. However, you’ll need to make a few key considerations.
Firstly, each full year of NI contributions increases your State Pension by about £6.30 per week from April 2024, which can add up significantly over time.
Secondly, the cost of covering NI shortfalls should be weighed against the benefits; for example, paying £825 per year of shortfall could yield a substantial increase in your annual pension, effectively repaying the investment in around 2.5 years.
Thirdly, your life expectancy and financial situation are crucial factors in this decision.
Lastly, consider tax implications and alternative retirement savings options, and seek professional advice if your financial situation is complex.
State Pension Basics
Let’s kick off with the basics, discuss the numbers, and chat about how many years of NI contributions you need to make to receive your full whack.
The State Pension is a weekly payment from the government. Currently, you can claim your State Pension when you reach 66, though this will gradually increase to 67 for all those born after April 1960. You can expect the State Pension age to continue to rise, too – but that’s another conversation.
How much State Pension you receive depends upon how many full years of NI contributions you have made.
| 💡 Key Point |
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| If you have paid 35 full years during your working life, you’ll be paid £221.20 per week from April 2024. That’s £11,502.40 per year. |
Sounds great, doesn’t it? But life is rarely lived in a straight line.
Many people are short of this mark because they have not paid enough full years of NI contributions. You might have taken a career break, worked overseas, been unable to work, or had low earnings for a while.
If you’ve checked your State Pension forecast and NI contributions record and found a shortfall, you can make it up by paying voluntary NI contributions.
How Much Is A Full Year’s NI Contributions Worth?
I’ve recently been helping a friend make sense of the State Pension/NI puzzle, and had the wonderful experience of waiting a total of almost an hour and a half for two calls to be answered.
However, what we learned was enlightening. Each year of full NI contributions is worth around £6.30 per week in State Pension payments from April 2024.
Doesn’t seem a lot, does it? £327.60 a year sounds much better. If you draw your State Pension for 20 years, that’s more than £6,500.
Actually, it will be more than this, because the State Pension increases by a minimum of 2.5% each year under current pension rules.
Now it’s getting interesting, isn’t it?
Should You Make Up Your NI Shortfall?
So, here’s the million-dollar question: should you make up any NI shortfalls? It’s more straightforward than you might think, though it does depend on your personal situation.
Here are the considerations we need to make:
Cost Vs Benefit
The first thing to consider is what benefit you could receive versus how much you’ll need to pay to receive it.
Think of it like an investment, though instead of investing in shares you’re investing in a guaranteed fund – a little like an index-linked annuity.
You’ll need to find out how much it will cost to pay those shortfall years, and then compare this to the extra pension you could receive.
In my friend’s case, they could pay around £825 for each year of shortfall to receive £6.30 per week extra in State Pension when they retire later this year. The total amount to make up their full shortfall worked out at around £9,000.
That’s a lot of money to find, but it is worth around £69 per week – or approximately £3,604 per year in extra State Pension payments.
Not allowing for tax (pension income is taxable), the capital outlay would be repaid in around 2½ years. After this, every penny of State Pension payment is ‘free money’.
Put another way, the guaranteed return on your investment when buying your NI shortfall is around 40% per year (with the amount you are paid increasing each year).
Life Expectancy
Next up – how long do you expect to live? While the average age of death in the UK is around 79 for men and 83 for women, none of us are the same. We have different health concerns, fitness levels, family histories, and lifestyle choices.
You’ll need to estimate how long you will live to figure out the value of funding your State Pension through voluntary NI contributions.
Alternatives
The State Pension isn’t your only option when investing for retirement. There are many options available.
For example, you might consider the advantages of ISAs vs SIPPs for retirement planning – both are tax efficient and allow you to bequeath funds (the State Pension, however, dies with you, though your widowed spouse may be able to claim some pension entitlement after your death).
It’s all about finding the right balance for you – a balance between convenience, need, longevity, and return.
Tax & Benefits Implications
Don’t forget about tax! Here, again, your situation is unique.
The State Pension is a taxable benefit, and you’ll need to consider how much you’ll be left with after tax has been deducted. It might also be that the extra State Pension you buy pushes you into a higher tax bracket, or could affect other benefits you might receive.
If your financial situation is complex, it’s wise to discuss with a financial advisor or tax consultant. If they don’t ask you to assess your State Pension entitlement, ask them why.
Where Do You Start?
First off, check your state pension here: https://www.gov.uk/check-state-pension.
Follow the instructions, and you’ll get a forecast for your State Pension within minutes. You can also view your NI contribution record, and learn how much it will cost to make up any shortfall.
The most challenging piece of the puzzle is making extra payments – you’ll need to phone the number on the government website, and wait for your call to be answered. Prepare a pot of coffee!
The Bottom Line
Deciding whether to make up a shortfall in your NI contributions to receive a higher State Pension isn’t straightforward, but by the same token it’s not as complicated as you might think. The less complex your finances, the easier the decision is likely to be.
This said, for many people, making up the shortfall will be a wise decision. It’s an investment that will have paid back your capital outlay within around three years after retirement (at current State Pension rates).
After this, it’s ‘free money’ – subject to tax implications, your personal preferences, and length of life, of course.