A Short Guide to State Pension Top-Ups

If you are approaching retirement, it’s likely that the State Pension will form a significant portion of your future income. While it probably won’t give you a luxury lifestyle, it can provide a valuable layer of security in your later years, especially if other elements of your retirement plan (such as savings, investments, private pensions, and property) have risks attached.

19th August 2021

But what if you have gaps in your State Pension record? Is it worth topping up your State Pension, or could the money be put to better use elsewhere?

How Does the State Pension Work?
First of all, it’s worth understanding what the State Pension will give you:

How Do You Build Up a State Pension?
You can build up a State Pension in the following circumstances:

You may need to claim National Insurance credits, as they are not always accrued automatically.

You cannot build up National Insurance credits if:

You need 35 years’ worth of National Insurance credits to achieve a full State Pension. If there are any gaps in your record, you will receive a proportional amount.

You can request a State Pension forecast at Check your State Pension forecast - GOV.UK (www.gov.uk).

Filling in the Gaps
If you have a shortfall in your record, you may be able to top this up by making voluntary, or Class 3 National Insurance contributions.

You can top up your record for up to six years after the tax year in which the gap occurs. This means it’s worth checking your record sooner rather than later, as you won’t always have the option to recover the missed credits.
You can check for gaps, and confirm your eligibility for Class 3 contributions at Check your National Insurance record - GOV.UK (www.gov.uk).

Are State Pension Top-Ups Value for Money?
The current rate for voluntary Class 3 contributions is £15.40 per week. This amounts to £800.80 if you need to top up a full year.

If you are planning for retirement, this might seem like a lot, but remember, you are buying a guaranteed, inflation-proofed income for the rest of your life.

At the current State Pension rate, if you are missing a year of National Insurance credits, your £800.80 would buy you additional income of around £266 per year. This is a return on investment of over 33% per year.

To put this in perspective, if you put the £800.80 in a private pension with the aim of buying a guaranteed, index-linked annuity, you could increase your pension income by around £26.92 per year.

Of course, a private pension offers other advantages, such as flexibility, and the ability to pass your fund on to your beneficiaries when you die. But in terms of numbers, topping up your State Pension is by far the most effective use of the money, increasing your returns tenfold.

So if you have gaps in your National Insurance record over the past six years, or you are no longer building up credits, it is well worth making voluntary contributions, providing you are eligible.

Please don’t hesitate to contact a member of the team to find out more about retirement planning.

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