The short answer to the question in the title is “yes”, if you aren’t getting a full state pension and you won’t qualify for pension credit, you should use whatever time you have and/or whatever money that you can get your hands on to top up your state pension. The closer you are to your state pension age, the more you should focus on this issue. People who are already pensioners can also top up, though this option runs out next April, if you retired before April 2016.
In my previous blog, I tried to help you understand how much state pension you’d get and when you get it. We can’t be certain about that last bit as the state pension age for Gen X is currently under review and may be 68 not 67.
But you should be pretty sure of how much you are getting from the state and – when the pension dashboards come along, you’ll be able to see your state pension alongside all your private pensions – which may make decisions easier.
Here’s my forecast, I know that so long as I get a national insurance credit for 2023, I will get a full state pension
Check your state pension forecast https://www.gov.uk/check-state-pension
In this blog, I show that if you have headroom to buy extra state pension, you should consider doing so as it represents super value for money. You top up your state pension by buying national insurance credits or “years”
Some people can get national insurance credits for free. I have written about that in another blog. But if that option isn’t available, you can boost your state pension by using your savings (or your tax free cash from your private pension).
Buying a full national insurance (NI) year costs £824, unless
- You’re topping up the two most recent tax years, in which case it’s about £20 to £30 cheaper
- You’re self-employed, or
- You’re topping up partial years, in which case it’ll cost less to upgrade it to a full year
You can use Martin Lewis’ calculator to see how much buying NI years could be worth, then look at our life expectancy tables to work out if you’ll likely live long enough to benefit.
The maths is simple. A full NI year usually costs £824 and adds up to £275 each year to your pre-tax state pension. Get this maximum gain and it’s worth it as long as you live at least three years after getting your pension (or three years after you top up, if you’re already getting it).
Your chances of living for three years after you reach state pension age are pretty good.
Note that you can’t pay to increase your new state pension beyond the maximum of £185.15 a week, so if you’re projected to get £180 a week or more, topping up is less good value for money.
People may well have other entitlements to a “state pension” from the old Graduated Pension Scheme and “protected payments” from SERPS that will paid in addition to any State Pension but I won’t go down that rabbit hole (If anyone is worried about this I will refer them to Bryn Davies and Andrew Young!).
Martin Lewis’ calculator gives an indication of the maximum amount buying different numbers of NI years could be worth in today’s money (though it’s possible to see less or no gain)…
So let’s look at this on a value for money basis
So , from one point of view, buying national insurance credits is a bet on how long you are going to live. Now tables don’t guarantee you long life, but this table, taken from Office of National Statistics, tells you that you are a lot more likely to live into profit than not (though your estate could lose out if you died tomorrow).
The second thing to consider – and these calculations take no account of this, is that the income you get from your purchase goes up. Currently it’s going up with earnings but from next April it goes up with inflation and it’s likely in future to continue to go up at the highest of inflation, earnings growth and 2.5% (so even if prices and wages go down – your pension still goes up).
To get an idea of how inflation could positively impact your pension, mess around with the Bank of England’s calculator. Here is a random sum I asked it to do for me
But to show you how random inflation is, here is the impact of inflation over the past 10 months.
That bottle of wine that cost £10 in January, now costs £11.03
Actually, the impact of inflation of £10 till the beginning of this year was (averaged out) pretty mild, but if we continue to have inflation at anything like the rate we have it today, the increases on the state pension are likely to be significant.
Intuitively – the cost of a year’s national credit looks great value but..
Using Retirement Line, IMO – Britain’s best annuity broker, I set out to understand what I could get at my state pension age with the amount I’d need to buy 10 years extra state pension.
My best quote gives me a lifetime income of £536.80 pa. To be fair to the excellent Retirement Line, I’d expect them to squeeze a little more out or the insurer on the grounds that I , like most 61 year olds , am not in the best of health. All the same….
My ten years extra national insurance credits would give me £2761 pa, what’s more that income – unlike the annuity, goes up each year.
Put simply, there’s no contest. If you have a small pension pot or some tax free cash or some money saved outside of pensions, you should be topping up your state pension by buying national insurance credits unless…
Unless you qualify for pension credit in which case , that extra income might disqualify you from a free state top-up under pension credit and the door to more benefits – housing, health and that headline free TV licence (which is actually the least valuable by a long way!)
Unless, you really fancy spending that money on something else which gives you a lot of fun today but leaves you without extra “pay” in the months and years to come.
Unless, you have a full, or will have a full national insurance record and will get the full single state pension. And if you look carefully at your state pension forecast, you may find that some of your state pension will be paid by an employer sponsored defined benefit scheme ( a COPE – contacted out pension equivalent). I’ll be getting £39 pw paid by my employer scheme (nearly 20% of my state pension). You cannot buy extra state pension to make up for your COPE – when you plan for the future – don’t double count – you get the COPE + a reduced state pension !
How you spend your money at retirement is up to you, no one’s forcing you to spend your cash on extra state pension, but I think you’ll agree that it looks a very attractive offer indeed.
Thanks. This is all super clear and gets the choices right. But I’m not total convinced where you say “Note that you can’t pay to increase your state pension beyond the maximum of £185.15 a week”.
This is complicated and I might have misunderstood. I’ve also promised myself that I will have a week off thinking about pensions. However, I think you mean “… you can’t pay to increase your New State Pension beyond the maximum of £185.15 a week”. People may well have other entitlements to a “state pension” from the old Graduated Pension Scheme and “protected payments” from SERPS that will paid in addition to any New State Pension.
Ah- see what you mean – will add a paragraph to explain options for pre 2016 retirees!
Taken from the blog….
“Put simply, there’s no contest. If you have a small pension pot or some tax free cash or some money saved outside of pensions, you should be topping up your state pension by buying national insurance credits unless…”
“Unless, you have a full, or will have a full national insurance record and will get the full single state pension. And if you look carefully at your state pension forecast, you may find that some of your state pension will be paid by an employer sponsored defined benefit scheme ( a COPE – contacted out pension equivalent). I’ll be getting £39 pw paid by my employer scheme (nearly 20% of my state pension). You cannot buy extra state pension to make up for your COPE – when you plan for the future – don’t double count – you get the COPE + a reduced state pension!”
I’ve checked my State Pension and National Insurance record on https://www.gov.uk/check-state-pension and this is what it says….
You can get your State Pension on –/–/2034.
Your forecast is £185.15 a week, £805.07 a month, £9,660.86 a year.
You need to continue to contribute National Insurance to reach your forecast.
Estimate based on your National Insurance record up to 5 April 2022
£178.61 a week.
Forecast if you contribute another 2 years before 5 April 2033
£185.15 a week.
£185.15 is the most you can get.
You cannot improve your forecast any further, unless you choose to put off claiming.
You’ve been in a contracted-out pension scheme.
Like most people, you were contracted out of part of the State Pension.
Contracted Out Pension Equivalent (COPE).
Your COPE estimate is £66.60 a week.
This will not affect your State Pension forecast. The COPE amount is paid as part of your other pension schemes, not by the government.
How does this affect the amount of State Pension you get?
Your Starting Amount for the new State Pension may be lower than that for people with similar circumstances who were not contracted out.
However, you should bear in mind that you may be able to increase your State Pension by adding further NI qualifying years before you reach your State Pension age.
My National Insurance record shows this….
You have:
40 years of full contributions.
11 years to contribute before 5 April 2033.
You do not have any gaps in your record.
On the Facebook ‘British Steel (BSPS2/old BSPS(PPF) – Pensioners Group’ there is a general feeling by many members that ‘contracting out’ was a bad thing and they’ve lost out through it. However, from reading my State Pension and COPE information this doesn’t appear to be the case?
Can I ask for your thoughts on this please Henry?
P.S. I’m not retired just yet and neither am I in receipt of my pensions (Defined Benefit and Defined Contribution).
The whole COPE issue is ridiculously confusing on the government website. It is entirely unclear whether my forecast maximum state pension will all come from the government or whether I’ll receive SP-£48/week (My COPE number). There were years when I was contracted into SERPS and there’s no information on whether this affects my pension. If I get the £48 deduction for COPE then, assuming that is paid elsewhere, that’s not going to be index linked in the same way as the state pension.