🚕 There is a saying on Wall Street that when taxi drivers start giving you stock tips, watch out!
🙋♀️ Well when your mother-in-law starts talking about a 5th April 2025 deadline to boost your State Pension, perhaps it's time to start listening...
Gaps in Your National Insurance Record
If you are a man born after 5th April 1951 or a woman born after 5th April 1953, and over the age of 50, then check your National Insurance record!
The full New State Pension currently pays £11,502 a year and from 5th April 2025, it will increase to £11,973. So, from 5th April this year, a couple receiving the full New State Pension will receive a combined amount of £23,946 a year, inflation linked for life.
To qualify for the full New State Pension you need 35 qualifying years of national insurance contributions. These are typically built up by working and claiming certain benefits.
However, many people have gaps in their record if they didn’t work for a number of years, were on a low income, were working abroad or were contracted out in the past.
Normally, voluntary NI contributions can only be paid to fill any gaps in the past six years, BUT, if you reached state pension age after 2016, you have up until 5th April 2025 to make voluntary national insurance contributions all the way back to 2006! From the 6th April 2025, the window closes back to 6 years.
So, what’s the first step in finding out if this is for you?
Well, the first step for you is to get a state pension forecast as this will show you whether you have any missing years. If you do have missing years, it will show you the cost of paying for voluntary contributions and the deadline to make the payment.
A Quick Recap of the State Pension
To get any type of State Pension at all you need at least 10 qualifying years. Once you have those 10 qualifying years, every additional qualifying year gets you 1/35th of the State Pension.
For example, from 6th April 2025, when the full New State Pension is £11,973, if you are reaching State Pension Age in May 2025 and you have 20 qualifying years you will receive a State Pension of £11,973 x 20 / 35 which is £6,842.
The Maths Behind Voluntary Contributions...
Here’s the maths. The current cost of buying a single qualifying year is £824 in most cases. From 6th April 2025, assuming you have at least 10 qualifying years, that will in turn give you an extra State Pension of £342 a year. Which means, you only need to survive two and a half years to break even.
If you are turning 66 this year and in good health, your life expectancy is 19 more years for a man and 21 more years for a woman (data from ONS). So, if you spend £824 to gain an extra qualifying year, you should expect to be around £6,840 better off (£342 x 20)! But it gets better, that doesn’t factor annual inflation so it’s likely to be higher than that figure. If that’s not a good return on your money I don’t know what is!
And it can get even better, you might find you can buy back years for less than the £824 mentioned if you were self employed or made some NI contributions for a year but not quite enough to qualify for a full year.
Are Voluntary Contributions for Everyone?
Although I’ve been letting you know how this is a once in a lifetime opportunity, it’s not for everyone. If you get a forecast and it says you already have a full State Pension, there is no value in making voluntary NI contributions as it won’t give you anything more than the full State Pension.
If you’re young and you’re going to be working for the foreseeable future, any gaps that you might have might be filled through working anyway. For example, if I have 17 years of contributions to date, the likelihood is I’ll be working for another 18 years to get to the full 35 years, so making voluntary contributions is probably not needed.
While making voluntary contributions can represent excellent value for people who are close to reaching State Pension Age but have gaps, there are potential downsides to consider. You would be making payments now to receive a benefit in the future, and if you pass away before State Pension Age, the benefit of these payments will be lost.
If you’re in poor health and your life expectancy is expected to be shorter than average, making voluntary NI contributions might also not be beneficial.
The Future of the State Pension and What You Should Do
You also have to remember, the State Pension age is going up. Currently it is 66 but from 2028 it is increasing to 67 and I wouldn’t be surprised if it continues to rise. And legislation can change the State Pension, the triple lock could be tinkered with and it has been in the past, and it could become means tested in the future. So lots to think about...
As always, this is big picture stuff and it can get quite complex so you should always talk to the Department for Work and Pensions or your financial advisor before making any voluntary contributions and you can speak to a specialist at the Future Pension Centre on 0800 731 0175 to discuss your options and the cost of making voluntary contributions.
While there are no tax deductions from state pension payments, these are treated as taxable income which means that the amount of tax you pay on other income in retirement could increase.
Conclusion
With 5th April approaching fast, now is the time to review your finances and ensure you’re making the most of the available tax breaks and planning. If you need guidance, speaking to a financial advisor could help you take advantage of these opportunities before the deadline.
This article is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.