A government scheme that allows people to pay to fill in gaps in their national insurance record and boost their state pension by thousands of pounds will end in one month.
Filling in gaps in your national insurance (NI) is a way to ensure you get more money when you retire in the form of a larger state pension.
People with gaps in their state pension include mums or dads who have been out of work when raising children or caring for parents, or people who have had periods out of work.
Under normal rules it is only possible to fill gaps in your NI record up to six years after the year in question.
After that, the year becomes a permanent gap in your record and could affect your ability to build up a full state pension. This means that 2016-17 would normally be the oldest year which could be filled in 2022-23.
However, until 5 April this year, people are able to go much further back and fill gaps for any year from 2006-07 onwards – an extra 10 years.
Normally, people need to pay voluntary “Class 3” NI contributions to top up their state pension entitlement. It costs £15.85 to buy one week’s worth, or £824.20 per year.
As the state pension is currently £185.15 per week, the Government boost is worth £5.29 per week or around £275 per year.
Someone who gets this boost for at least four years will recover their initial outlay (net of basic rate tax) and everything beyond that would be profit. This is until you die.
In an extreme case, someone who missed the deadline would lose the chance to top up a further 10 missing years of NI contributions (from 2006-07 to 2015-16 inclusive).
For these people, although the initial payment would be £8,242 (10 lots of £824.20), the annual state pension boost would be around £2,750.
Therefore, someone who was retired for 10 years would get back around £55,000 in total (before tax) for a one-off payment of a little over £8,000, a profit of £47,000.
This income will be protected by the “triple-lock”, meaning it rises every year by the highest of average earnings, inflation or 2.5 per cent.
In April this year, the state pension will increase by 10.1 per cent, in line with inflation in September 2022.
However, the Department of Work and Pensions (DWP) says some are people struggling to buy NI before the deadline, due to phone logjams.
As a result, it said people may be able to purchase them after 5 April – although this will only happen on a case-by-case basis.
Tom Selby, head of retirement policy at AJ Bell, said: “While some of the jargon and complexity involved might be off-putting, boosting your state pension entitlement can be an extremely savvy move, financially.
“Broadly speaking, anyone who increases their state pension on these terms will need to live three to four years in order to be in ‘profit’ from the deal.
“Given average life expectancy at state pension age is around nine years for men and 11 years for women – with a decent chance of living into your 90s – those in good health who can boost their state pension could benefit handsomely by doing so.”
Who won’t be able to benefit?
However, not everyone can benefit. Those who are short of a full state pension because of extensive periods of “contracting out” – a deal between pension schemes and the Government – are one such group.
In contracted-out schemes, workers and employers paid less in – a “contracted out” rate of NI contributions – and in return the company pension scheme promised to replace part of their state pension.
For example, if you were contracted out through a defined benefit (DB) scheme, you were promised a certain amount of pension, in place of the additional pension you were giving up. Contracting out on a DB basis ended in April 2016, when the government’s state pension reforms came into force.
Those who are younger are also unlikely to benefit as they naturally build up the 35-year NI record needed to receive the full state pension. In these circumstances, buying extra NI risks being a waste of money.
It is also worth considering that a state pension counts towards income tax bills which means that by increasing the value of your state pension, you could also push yourself into a higher income tax bracket.
Selby added: “Where this is the case, the benefit of buying extra state pension years will effectively be lower and so it will take a bit longer to ‘break even’.
“In many cases. it will still be worthwhile to buy extra NI years but you should take the time to fully think through the financial implications, ideally with the help of a regulated financial adviser.”
Anyone considering paying voluntary NI contributions should contact the Future Pension Centre before parting with any cash, as if you buy NI years and it doesn’t increase your state pension, there is no guarantee you will get your money back.