From October 2015 the government is offering some people a limited opportunity to top up their state pension. Who does the offer apply to and is it worth going for?
State pension and NI contributions
As you know, the amount of basic state pension depends on how many full years of NI contributions you have paid by the time you reach state pension age (SPA). From 6 April 2016 the number of years needed to qualify for the full pension jumps from 30 to 35.
Trap. Anyone who reaches SPA before 6 April 2015 and doesn’t have 35 years’ NI contributions won’t receive the full pension and can’t add to their NI record through the usual method, i.e. by paying contributions from earnings. This is where voluntary contributions can come into play.
Class 3A contributions
The government realised that some people would lose out unfairly because of the new 35 year rule and so is offering them a one-off chance to pay to top up their state pension. If you reach state pension age before 6 April 2016 (even if that’s not you keep reading for other options) you can add to your qualifying NI years, and so improve your state pension, by paying Class 3A contributions.
The main terms and conditions are:
- contributions are payable as a single lump sum that must be paid by 5 April 2017
- the cost varies depending on your age, gender and the number of extra NI contribution years you want to buy (see below)
- the extra state pension will be payable for life
- if you die having paid Class 3A NI and your spouse survives, they will be entitled to receive at least 50% of the extra pension for the remainder of their life.
The maximum extra pension you can buy is £1,300 per year, but you can choose to buy as little as £52 per year. Naturally the cost is different, but to give you some idea, a woman reaching SPA on 1 April 2016 who wants to buy £520 per year of extra pension would have to pay £9,000 Class 3A NI by 5 April 2017.
Tip 1. GOV.UK has a handy calculator for checking the cost of extra state pension (see The next step ).
Tip 2. Before paying Class 3A contributions check if you’re allowed to pay Class 3 contributions instead (see The next step ). These can be cheaper than Class 3A, but you receive the same amount of extra state pension.
Class 3 contributions
Class 3 contributions can be paid by anyone with gaps in their NI record in the last six years even if you’ve already reached your SPA. The cost varies, but you can expect to pay around £700 for each top-up year, which at current pension rates buys you about £200 per year if your SPA is before 6 April 2016 and £230 if it’s later.
Tip. Gaps in your NI record can occur for many reasons, e.g. you were working abroad or unemployed and not claiming benefits. Whatever the reason you can find out by asking HMRC (see The next step ).
The offer applies if you will reach state pension age before 6 April 2016 and have gaps in your NI contributions record meaning that you don’t qualify for the full state pension. You can check with HMRC for gaps in your record and if so buy Class 3A contributions which can give you extra pension of up to £1,300 per year.