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A little publicised quirk of the government’s pensions reforms in 2016 allows certain individuals to make an index linked, triple-locked in fact, 32% per annum return on their investment if they have gaps in their national insurance (NI) record.
To get a full new state pension of £168.60 per week you need to have contributed at least 35 years’ worth of national insurance contributions. If you or someone you know has less than this, your/their pension will be reduced by a proportionate amount. You can get a pension statement online from HMRC to tell you how many years you have missed and what pension you can expect.
Paying Class 3 NI contributions of £780 per year for missing years will boost your pension by £250.49 per year for the rest of your life (based on 2019-20 rates). A rate of return of 32% per year index linked.
As if that was not good enough it gets better though. If you are contributing £780 in the current tax year, HMRC will allow you to catch-up on up to six previous years NI payments at the rate that was in force at the time. For example, class 3 NI payments were only £626.60 for the year 2010-11 instead of £780. You need to be paying the full rate class 3 contributions for the current tax year though or HMRC will charge £780 for any catch-up years.
This will probably not be of much help to younger people who would be expected to accrue the full 35 years over their working lifetime. However if they have parents, family or friends approaching retirement then this could help a lot.
Working age women who have not gone back to work after bringing up children are particularly affected by this. They may assume that their pensions will be based on their husband’s NI contributions, but those days are gone. They need 35 years NI contributions (or exemptions) in their own right.
According to FTAdvisor, those who have contracted out of SERPs or the state second pension may also benefit, although I’m not sure how that would work?
This ‘loophole’ may not last long. The government could drop the scheme or make it significantly more expensive.
Google : class-3-national-insurance-is-a-top-class-investment
This is not financial advice, just general information. Please do your own research but do it quickly before the opportunity disappears.
This is first class info
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
You are too kind DL.
I visit PT often but don't usually have much to contribute. Maybe that will change when I chuck the day job next year.
although I run a business I never take my eye off the pension
we all need a good income in later life when we hand over the business
the pension allows us to do it
Be careful about which years you catch up on though because if you've been moved to the new scheme there is no point in catching up on missed years before 2016 as it will have no affect at all and you'll pay for nothing. I got moved to the new scheme and went from being fully paid up to needing another 6 years because of being contracted out of SERPS.
Did you get a statement from HMRC? That is what my wife did and it stated that she was allowed to make catch up payments as far back as 2007-8. She has made the payment for that year in addition to the payment for 2018-19 and it has definitely added two years to her pension entitlement. My wife was not working though. With contracted out SERPS the situation may be different? Worth getting a statement from HMRC to find out for sure I think.
Yes - I did the interview with the future pensions team and they told me that there was no point in making up the couple of years that I missed before 2016 because they'd already assessed me at that point as being better off on the new scheme than the old one and so paying up years prior to that would make no difference. A lot of people have paid up prior years and not realised this.
I'm assuming that you are young enough to be able to make up the six lost years between 2016 and your normal retirement age?
Under these circumstances HMRC would not offer you historical catch-up payments.
Ho, hum. Why do they have to make it so complicated and opaque? How do you check that HMRC have assessed your case correctly if the rules are a state secret?
It's nothing to do with my age but whether I was assessed at the time the scheme changed as being better off being on the old scheme or the new scheme. Once that decision was made it can't be gone back on, even if paying up prior years at that time would have meant I'd have been better off on the old scheme.
The best synopsis I can find on all of this is on Royal London's website. Google 'Topping up your State Pension'.It is a 60 minute read to go through. If you still have the will to live after that lot you could benefit yourself or your nearest & dearest.
One important point to note is that topping up your state pension may affect your eligibility for other means tested benefits. Probably not of interest to the majority on this site but some on low incomes could be affected.
Another point to mention is that if you have nine years NI contributions you get no pension at all. Adding just one years class 3 contributions means you get £2505 pa, for an investment of £780 a rate of return of 321% pa.