Martin Lewis has issued an urgent warning to people who may not realise an important “deadline is looming” which could affect how much State Pension you will receive from the Department for Work and Pensions (DWP) in retirement. People will only be able to plug gaps in their National Insurance record going back as far as 2006 until April 5, after that date, you can only buy missing credits for the last six years.
In this week’s pensions special of The Martin Lewis Money Show Live, the consumer champion explained how the New State Pension was introduced on April 6, 2016 and to qualify for the full payment, currently worth £185.15 per week, you would need “35-ish years” worth of National Insurance Contributions.
He told viewers: “If you’re aged 45-ish to 70, this is an urgent State Pension boost.”
Martin explained how some people may be missing National Insurance years for a number of reasons including caring for someone, caring for a child, living abroad, on a low income or having a career break.
He said: “This is why it’s so urgent. Transitional arrangements were put in place in 2016 and they end this tax year, that is April 5 and about six weeks away - that is not a long time to do something quite complicated.
“Until then, you can plug any gaps back to 2006 in your National Insurance years, but after that, you can only go back six tax years to 2017.
“So there are 11 years that you will lose the ability to buy abc from April 6.”
Martin then urged everyone under State Pension age to log on to the GOV.UK website and check their State Pension summary using the online forecast tool here.
This will tell you whether your State Pension is on track to be paid at the full rate when you reach retirement age.
The next thing the founder of MoneySavingExpert.com encouraged everyone to check is their National Insurance record on GOV.UK here.
Martin explained if you see any tax years from 2006 which state ‘year is not full’ or have no record next to a certain year, then you need to consider very carefully whether you should buy those missing years.
He highlighted how a year can be marked as ‘not full’ even if it is short by just one week. However, before anyone rushes off to buy missing National Insurance years, he shared that there may be ways to top-up for free.
He said: “If you were a carer, or had childcare responsibilities, or an illness, you can go and check via the National Insurance Credits section of GOV.UK and you may get those years back without having to pay for it.”
Martin urged caution before buying missing National Insurance years as they cost around £800 per year and you need to make sure it will be a worthy investment for your retirement.
Buying back missed years can be a good way to boost retirement income as the full New State Pension will be worth up to £10,600.20 over the 2023/24 financial year - paid every four weeks at £203.85.
Buying just one qualifying year of National Insurance at the standard rate of £824.20 adds up to £275 per year - 1/35 of the full rate of the State Pension - to your pre-tax State Pension.
The breakeven point of making those contributions is three years after you start claiming your State Pension, so it’s a worthwhile investment for the many years of retirement to come - if you can afford to do so.
You can watch the pensions special of The Martin Lewis Money Show Live on the STV Player.
Step-by-step guide to boosting State Pension payments
Here is a five-step guide for men born after April 5, 1951, and women born after April 5, 1953, to help them decide whether it’s worth making up any missed years before they are lost forever.
Step 1: Check your State Pension record
There are several reasons for having a gap in your NI record - from a career break or taking time out to raise a family, to caring for elderly relations, living and working abroad, earning a low income or being self-employed and not paying contributions, again because of a low income.
The danger of gaps is that you don’t accrue enough qualifying years to receive a full State Pension. Britons typically need at least 10 years of NI contributions to receive anything at all and at least 35 years to receive the maximum amount, which currently stands at £9,600 a year for those retiring after April 6, 2016 and will rise to £10,600 from April.
It does not need to be 35 consecutive years, but you must have hit that target over the course of your working life to receive the full entitlement.
If you are not at State Pension age, simply check your NI contribution record by logging onto the State Pension forecast calculator, which you can access through your Government Gateway here.
You will receive a State Pension summary outlining what year you are entitled to receive a State Pension with a guide on the amount you will receive weekly, monthly and per year (without factoring in inflation) according to your current and projected contribution level.
The summary also outlines how much you would receive if you continued to contribute and what steps you need to take to improve the forecast if there are any shortfalls.
For those who are already at State Pension age, they can simply check their National Insurance record for any incomplete years since 2006.
Step 2: Assess whether filling any NI gaps makes sense
Your State Pension Summary will clearly state how many years of contributions you already have, how many you have left to contribute before you retire and the number of years in which you did not contribute enough.
These will be marked as ‘Year is not full’ with guidance on how much you need to pay in voluntary contributions for each year by April 5.
Whether you need to pay up depends on factors such as how many more years you plan to work. Those aged 45 and over who are close to retirement age and won’t have enough time to achieve 35 qualifying years to receive the full New Sate Pension may be more inclined to top up, while someone close to retirement and in poor health might not feel it is worth it.
For younger people, it may not be worth the expense of filling the gaps as they will hit the 35-year contribution target anyway over the course of their life through work or NI credits. For them, it would be taking a real risk to buy now unless they are sure they won't make them up later, for example, because they live overseas.
Which years you have missed is also key:
- If you have gaps between the 2006/07 and the 2016/2017 tax years, these will no longer be available to buy back after midnight on April 5, so prioritise them first. After that the number of extra years that can be filled drops down to the last six tax years, which gives you more time to plug missed years between April 2017 and today.
- Ultimately, any potential gain from buying voluntary NI contributions will be wiped out if your health is poor and you are unlikely to live long enough to benefit - with the breakeven point for buying back one year to make financial sense three years after you start claiming your State Pension.
There are also other complexities to consider:
- If you are a higher earner, it might not be worth topping up your NI record as it could tip you into a higher tax bracket when you receive your State Pension income taking you longer to break even on voluntary top ups.
Step 3: Get bespoke advice before making a decision
Calculating whether to top up can be confusing and ultimately there is no point paying for more years than you need because you won’t get that money back.
The best solution is to call the UK Government’s Future Pension Service on 0800 731 0175 to double check how many years you can buy and whether voluntary contributions will add to your State Pension. Those who have already reached retirement age must contact the Pension Service on 0800 731 0469.
What you might find when you chat to a government pension expert is that you have more years built up than you realise as you can also build up NI years for free by acquiring tax credits.
Scenarios that can potentially earn NI credits include:
- Being a parent or guardian registered for child benefit for a child under 12
- Being on Statutory Sick Pay
- Looking for work
- Fostering a child or caring for a sick or disabled person
- Being on jury service
- Being on maternity, paternity or adoption pay
- Being wrongly imprisoned
While there are certain stipulations for each scenario, NI credits can often be automatically applied, so it is always wise to put in a manual claim if they are not on your record. Your advisor can chat through this with you and offer guidance for your unique situation and whether buying a missing year will actually give your eventual state pension a bump up.
Step 4: Calculate the cost of topping up
For most people the cost to make up a full year by April 5 is:
- £824.20 for gaps between 2006/07 to 2019/20
- £795.60 for gaps between 2020/21
- £800.80 for gaps between 2021/22
This rate of NI contribution is known as Class 3.
However, people pay different rates depending on their situation. While those in full employment pay Class 1 NI contributions which are based on earnings and automatically deducted by their employer, the self-employed pay Class 2 and 4 based on their taxable profits and those living abroad pay Class 2.
Class 2 is considerably cheaper at about £160 for one year than Class 3, so when you consider that one qualifying year of NI adds about £275 a year or £5.29 a week to your State Pension for the rest of your life - it's easy to see the value of buying back those missed years.
For someone who was living abroad during their missed year, they need to download and complete HM Revenue and Customs (HMRC) CF83 form and send it to the address on the form.
To qualify for Class 2 NI contributions, you will need to prove you lived in the UK for at least three years in a row or paid NI contributions for at least three years before you left the UK and give the names and addresses of the employers you worked for during your time overseas.
Meanwhile, for those who have retired abroad, they must pay Class 3 NI rates for any missed years - find out more about this on GOV.UK here.
Step 5: Making the payment
Once you have decided how many years to top up and which ones exactly, contact HMRC to find out the cost and how to get the 18-digit reference number you need to actually make a payment and ensure the sum is recorded on your NI record.
This number can be given to you over the phone or sent by post but allow at least two weeks for this to come through by mail.
Once you have the 18-digit number, paying for the missed years can be done by online bank transfer, from a bank at your bank or building society or by cheque to HMRC.
Full details on plugging gaps in your NI record can be found on GOV.UK here.
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