Fail to pay enough National Insurance before you retire and you could miss out on the full state pension. But does making up your missed payments make financial sense?
What is National Insurance and what does it pay for?
National Insurance is not strictly a tax and while it may certainly feel that way, its aim is to benefit those who contribute to it.
The main areas funded by National Insurance contributions are the NHS, unemployment benefits, sickness and disability allowances and the state pension.
Aside from the NHS, most of these benefits are in some way linked to your National Insurance contributions. However, only your state pension allowance and entitlement to bereavement benefits are impacted when you top up; your entitlement to other benefits will not change.
How to make National Insurance count
In order to claim the full basic state pension you will need to have paid sufficient National Insurance for a certain number of years.
Each year that counts towards your state pension entitlement is called a qualifying year. The number of qualifying years you need to build up to qualify for the full basic state pension depends when you will start to claim it.
- If you will retire after 6th April 2010, you will only need 35 years of National Insurance contributions – both men and women – to be entitled to the full state pension.
For the 2016/17 tax year, you will need to earn £8,060 worth of income to pay enough National Insurance for it to count as a qualifying year.
If you fail to accrue the full number of qualifying years you need, you will not receive the full basic state pension but a proportion based on your National Insurance contributions.
For example, if you have made 20 years contributions you’ll be paid 20/35 of the basic pension.
Do you have to top up?
National Insurance itself is compulsory for most people and is usually deducted automatically from your salary, but not if you are offshore or living abroad.
However, if you get a letter from HMRC asking you to make up your National Insurance contributions you are not under any obligation to send off a cheque.
Instead this is more an invitation to top up your NI contributions for the previous tax year (letters sent out in 2016/17 will refer to the 2015/16 tax year) so that it counts as a qualifying year towards your pension entitlement.
Should you top up?
If your National Insurance contributions do not meet your annual threshold (this can vary depending on the type of NI you pay) HMRC will write to you between September and January to ask if you would like to make up the difference if you live in the UK, if not you may not be aware, please read more !
Whether you decide to pay to top up your National Insurance contributions will entirely depend on your circumstances.
Here are some of the main points to consider:
Will you reach your target?
How close you are to making 35 years of qualifying National Insurance contributions should have a big influence on whether you opt to top up or not.
If you are in your 20s or 30s for example and expect to be working for the next 20-30 years you may decide your money is better used elsewhere.
Equally, if you’ve already contributed 35 full years of National Insurance or are very close, then you may feel that there is no benefit to topping up.
However, if you are nearing retirement and missing a number of year’s contributions, you may feel that it’s worth your while.
Do you need the money now?
Whether you can realistically afford the payment is another important consideration when deciding whether to top up your National Insurance contributions.
The amount you might be asked to pay can vary hugely depending on your income and the type of National Insurance you pay and can easily run into the thousands of pounds.
Before you send this money off to HMRC you should consider whether paying will leave you hard up, or if the money might be better used to now, be that to pay off debts or add to your savings.
Will you get a better return in a private pension?
Rather than topping up your National Insurance contributions you could opt to invest the money in a private pension instead; especially as the state pension may be so minimal that you’ll need to supplement your retirement income anyhow.
Essentially this would mean sacrificing your missing year’s National Insurance entitlement in exchange for investment in your private pension.
If you are considering this option you will need to weigh up the impact on your state pension:
- Will doing this mean you don’t build up enough years of NI contributions to receive the full entitlement?
- Will these losses will be offset by the money you will get back through your private pension?
It is always worth consulting an Independent Financial Advisor if you need help.
* Since 1945 state pension has grown to £155.65 per week, to get this annuity from a private pension scheme would mean contributions in excess of £275,000……is it worth you getting up to date for as little as £2.80 per week??, we know it’s not a huge amount of money, but you are entitled to it at retirement, so this can be a little added retirement money you may have thought you were not entitled to while offshore or not living in the UK.
Will there be a state pension in 20-30-40 years’ time?
Yes ! Little has changed since 1945 and no UK resident will ever opt to vote a government in to power who wants the State Pension gone….They’ve been speculating this for years !!
As the UK population continues to age many people believe that in the long run the state pension will simply become too big a burden to maintain and that people will eventually be asked to fund their own retirement.
While this is essentially all speculation, if you’re at the start of your working life you may decide that paying your outstanding National Insurance contributions will be wasted and better placed in a private pension plan.
Can I still pay National Insurance as an expat offshore?
Yes, you can even back date it 6 years and get your NI up to date with one payment or via direct debit. Currently as an expat you are classed as a Class 2 tax payer and the cost of keeping you NI up to date is £2.80 per week.
If you have been out of the UK for a number of years this may not affect the fact that you can have FULL UK state pension, as long as you have paid NI for a total of 35 years between the ages of 16-68 you are entitled to this in full.
Seek advice
It is likely that a number of different factors will influence your decision as to whether to top up your National Insurance contributions.
To get an idea how much you will receive in retirement from the state pension or to find out how to do the assessment please request telephone call from us here at Farringdon Group or contact me on syeomans@farringdongroup.com.
I hope that you have enjoyed reading this post.
CEO
Kuala Lumpur : Malaysia
Stuart Yeomans 