The April 2023 State Pension Deadline – Could You Benefit from a Pension Top-Up?

The State Pension you receive will depend on your National Insurance record. But what if you don’t have the credits required to build up a full State Pension?

There has always been an option to top up your National Insurance record, subject to certain conditions. However in normal circumstances, you can only go back six tax years. But a little known concession means that you can now top up your National Insurance record as far back as 2006/2007, an additional ten years.

This scheme is ending in April 2023, and will revert back to the normal six year period. So if you think you may have gaps in your State Pension record, it’s important to act now.

A Short Guide to the State Pension
For anyone retiring after April 2016, the full State Pension is £9,627 per year. The State Pension age is currently 66, but will gradually increase to 68 between now and 2046.

The State Pension is protected by the triple-lock, which means that it must increase every year in line with prices, earnings, or 2.5%, whichever is higher.

Under the post-2016 rules, State Pensions cannot be passed to a spouse in the event of death. Your State Pension is based on your own National Insurance record only. There are still some transitional rules in place for anyone who built up benefits under the previous system and is entitled to a ‘protected payment’ in addition to the standard State Pension.

The State Pension on its own is unlikely to provide a comfortable retirement. But when you consider that realistically, you would need to build up a pot of at least £250,000 to generate the level of income available from the State Pension, it’s clear that it’s worth preserving.

How to Build Up Your State Pension
To achieve a full State Pension, you need a National Insurance record of 35 years. However, providing your record is complete for at least 10 years, you will build up a partial State Pension.

You can build up your National Insurance record by:

• Making National Insurance contributions via PAYE if you are employed, or through self-assessment if you are self-employed.
• Receiving credits if you earn between the lower earnings limit (£6,396) and the primary threshold (£12,584) At this level, you don’t actually pay National Insurance contributions, but still build up your record.
• Receiving certain benefits, including Jobseeker’s Allowance, Employment and Support Allowance, Child Benefit, or Maternity Allowance. The full list can be found here.
• Making voluntary contributions.

What if You Have a Shortfall?
There are many reasons why you might not have a complete National Insurance record. For example, if you have taken time out of work to care for a child or relative, without claiming the relevant benefits, you won’t receive credits. Similarly, if you have taken a career break to travel or undertake further education, you may also find that you have a gap.

You can check your State Pension record here. This will confirm whether you are on track to receive a full State Pension, or whether you have any gaps in your record.

If you have a shortfall in your State Pension, you can find out more by checking your National Insurance record. This will tell you exactly how much you have built up in any given year.

Until April 2023, you can top up your record for any tax year as far back as 2006/2007, providing you were eligible to make contributions in that year. From April 2023 onwards, you will be able to top up your record for the previous six years only.

Making Voluntary Contributions
You can make voluntary National Insurance contributions for a given year if you were earning under the lower earnings threshold and did not build up credits through other means.

If you were living abroad, you may be able to make voluntary contributions for the relevant years if:

• You lived in the UK for at least 3 consecutive years before leaving, or;
• You have paid at least 3 years’ worth of contributions

Voluntary contributions are known as ‘Class 3 contributions,’ and the amount payable is £15.85 per week. Assuming you need to top up for a full year, this amounts to £824.20.

While this might seem like a significant amount, each year you top up will buy you an index-linked income for life of £275.05 per year. This is a guaranteed return on your investment of 33%, which is not available anywhere else.

Should You Top Up Your State Pension?
Of course, there are some risks in topping up your State Pension. Firstly, it does not include a spouse’s pension. But this can be addressed through other means, for example by contributing to a personal pension as well, or by taking out life cover.

A greater risk is that the future of the State Pension is in the hands of the government. Retirement ages, income levels, and inflation-proofing are all outside your control. There is no guarantee that the State Pension will always be available. However, the likelihood is that any changes to the State Pension will be phased in gradually, and that you will retain any benefits you have already built up. Of course, we can’t guarantee this, but from a political point of view, any party which significantly reduces the State Pension can expect to lose votes.

Remember, the maximum State Pension is based on a 35 year National Insurance record. If you are already likely to achieve this without making topping up your record, it’s likely that any voluntary contributions would be wasted.

In most cases, if you need to top up your record, can afford to make voluntary contributions and you are in reasonably good health, you should do so. But the State Pension is simply one part of your wider financial plan. Other areas, such as cash management, financial protection, investments and pension planning should also be considered to make sure you gain the maximum benefit.

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