NI top-ups can stretch that pension a little further

FILLING in any gaps you may have in your state pension record has represented great value for money … and still does.

The amount of state pension you get is based on your total National Insurance payments figure. If you haven’t made enough contributions then you won’t get a full state pension. For example, you may have been employed on low earnings or unemployed but not claiming benefits. Those who were selfemployed or worked abroad may also have let things drift.

But you may be able to pay voluntary contributions to boost the amount you receive, even if you have already retired.

If you can afford it, the rewards can be large relative to the cost of doing so.

Indeed so attractive is the deal the mantra has been to take your time, perhaps enjoy some return on the capital you have earmarked to fix the holes, and then use it to pay up the missing amounts either when you reach state pension age or within the six years allowed by the system, whichever is sooner.

After all, though the money will boost your pension when you draw it, you otherwise gain no immediate benefit.

But hold on, time to snap out of your lethargy, because the cost of making up gaps is set to jump from April 5 with the new tax year.

For instance, making an annual rate contribution for tax year

2010/11 currently costs £626.60.

If you make the contribution after April 5, however, it shoots up to

£780.

Steve Webb, Royal London director of policy and former pensions minister, told Moneywise: “For many people, topping up their state pension through paying voluntary NICs can produce a good rate of return because the cost is subsidised by the government.

“But the price of voluntary NICs will rise sharply in April so those considering doing so may wish to act quickly.”

They could save themselves hundreds of pounds in the process, he noted.

From the new tax year those with full state pension entitlement will receive around £168.60 per week – £8,767 annually.

This means that each additional year you plug is worth around £4.80 per week for life. This is equivalent to £250 per year. So, if you pay one extra year of what are termed Class 3 NICs you’ll earn it back in three years. That’s £5,000 over the course of a 20-year retirement.

Sounds good, doesn’t it? But, as with most financial planning, it is not quite as simplistic as it sounds.

Just because you can fill gaps in your record, it doesn’t necessarily mean you should.

Discover your ‘Personal Maximum’ figure on the ‘Check your State Pension’ website or by speaking to the Future Pension Centre on 0800 731 0175 – you can also write to The Pension Service 9, Mail Handling Site A, Wolverhampton, WV98 1LU.

This is the most you can get in State Pension if all the gaps in your record were sorted.

If your Personal Maximum is already greater than or equal to the required level, it may be that you’ll get a full state pension without needing to pay any voluntary contributions.

Secondly, making top-up payments when you are elderly is akin to gambling on your longevity.

If you are in poor health, perhaps fearing you may not have much longer for this world, a future increase in your pension may be little use to you – perhaps better to utilise what money you have saved in the here and now.

It is estimated that 12,000 people top-up their state pension every year. So well worth researching whether you should join them.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice