Workers who retire today need to have made 35 years of qualifying NI contributions to get the maximum new state pension. Currently, that is worth £9,627.80 a week. This rises to £10,600.20 a year from April, thanks to the triple lock, but those with an NI shortfall could get much less.
For every year you fall short of that 35-year NI target, your state pension is reduced by 1/35th. So if you only make 34 years of NI contributions, you get £275.08 less income each year. That’s a hefty loss for missing out on just one year of NI.
From April, the annual loss will rise to £302.86. Worse, those who fail to make the minimum 10 years of NI contributions get no state pension at all. Everybody who has yet to retire should get a state pension forecast, to see whether they are on course to get the maximum amount.
To find out more, contact the Future Pension Centre.
If you get your forecast and discover you are heading for a shortfall, you need to act fast to plug any gaps in your NI record.
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“Currently, buying voluntary NI payments costs £800.80 for each year of state pension that you buy. In return, you get an extra £275.08 a year for life.” You effectively get your money back in just three years. After that, your purchase delivers “pure profit”, Tully says.
The longer you live after you retire, the more the sums work in your favour.
Somebody who lived for 20 years past retirement age would get a return of more than £8,000 on their £800.80 investment, assuming the state pension rose at an average rate of three percent a year. “It could be one of the best investments you ever make.”
Tully says this option works best for those in good health who have a higher life expectancy. Those in poor health may only get state pension for a few years and could be better off spending the money today.
Buying extra state pension is a waste of money if you are already on course to get the maximum amount, as you don’t get extra income for making more than 35 years of NI contributions. “Class 3 NI contributions are is not right for everybody, but a great deal for some,” Tully says.
It works best of all for those who are likely to end up with less than 10 years of qualifying NI contributions.
Somebody with just nine years of NI contributions who buys one additional year will spend £800.80 and effectively get 10/35th of the state pension.
That is currently worth an additional £2,750.80 a year, arguably one of the best investments you will ever make.
Whatever your position, it is worth checking how much state pension you will get at retirement.
You can only make voluntary NI contributions going back a maximum for six years. So the earlier you start, the better.
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