It’s not often that people choose to pay tax voluntarily, but new figures from HMRC show that people have been queueing up to give the Government their money in the form of voluntary NICs – over a third of a billion last year… https://t.co/ullVDX8ckH

— Steve Webb (@stevewebb1) December 14, 2023

People may have gone off “annuities” but that doesn’t stop them buying pensions.

People do not get tax-relief on the payments they make to purchase extra state pension. They pay the going rate out of taxed money.

People do not take advice on whether to make these payments from financial advisers or accountants , they watch Martin Lewis and scour Government websites , often queuing on phone lines to validate their numbers with Government officials before sending money to the Government by cheque or electronic transfer.

There is a whole sector of pension planning that is disintermediated and disinterested by mainstream retail advisers.

Value for money that anyone can understand

LCP reliably provide the best commentary on matters to do with the private pension . Here is their summary of why it makes sense for ordinary people to buy extra state pension

For most people, voluntary NI contributions represent exceptionally good value as they are subsidised by the government. Those wishing to pay for previous years are currently charged £15.85 per week or £824.20 to fill a full historic gap year. This will typically add 1/35 of the full state pension rate or just over £300 per year. This means that anyone who draws a pension for at least three years (or at least four years allowing for basic rate tax) will generally win out from paying voluntary NICs.

The problem is “headroom”

Like the king of the apes, many people find there is a glass ceiling to the amount they can contribute to their pension. They cannot get a state pension higher than the current maximum payable ,

Though it looks a bit intimidating, the Government’s website on how to pay extra class 2 and class 3 national insurance contributions is excellent. You can access it here

If you are lucky enough to have an entitlement to the full state pension (either paid by the Government or by your company pension and the Government) you will be told so here.

If not , the same link will tell you , you have headroom to pay and from there you can find out the cost of buying full years or topping up incomplete years. It’s something that is becoming an increasingly important part of people’s pre-retirement planning.

What if you have no headroom?

If you have no headroom to buy more state pension, you are currently short of options to buy pension directly – other than by using your existing private pensions.

If you want a guaranteed income from your pension savings, you currently have to invest in a workplace pension or a non-workplace plan known as a SIPP (a self-invested personal pension). You can then buy a pension annuity with the money in the pot.

If you want to buy-pass the pension and have your annuity paid to you without it being part of your pension, you can buy a purchased life annuity. You won’t get the same tax advantages (tax-relief on contributions and 25% of the money paid to you tax-free) but you will pay lower tax on the annuity itself. If you’ve got capacity to pay money into your pension and then purchase an annuity once the money is in, you will probably do better.

If you’re reading this in the spirit in which I wrote it , you will probably be thinking that having to contribute, invest and then purchase an annuity is a lot of hard work to achieve something very simple (a wage for life), then you’ll be pleased to know that people (including the Government) are trying to make things easier for people.

But progress towards CDC, scheme pensions and pension bonds which ordinary people can buy as alternatives to annuities , is proving slow.

But the lesson that the Government should be taking from the popularity of people buying state pension credits through national insurance , should tell them that there is political capital to be made by encouraging reform. The Government has got this message in principal but getting all its various departments and regulators to agree how to ensure these alternatives are safe and popular, is proving hard.

#