Making UK pension top ups
The rules governing UK state pensions are changing for people reaching pension age after April 6, 2016.
THE rules governing UK state pensions are changing for people reaching pension age after April 6, 2016.
Now may be a good time to consider whether to top your pension up with “voluntary” National Insurance (N.I.) payments. We review the basics.
The Pensions Bill 2014 was passed in May and brings changes for expats. For many the pension they eventually receive under the UK’s new “one-tier” system should be higher than the one they would have had under the old rules.
However, five more years of N.I payments will be required for a full pension and pension age will gradually rise to reach 67 by 2028.
Under the current system, there is a “basic state pension” of £113.10 per week, plus a Second State Pension which varies depending on earnings (and hence N.I. payments) which can amount to a maximum £167.40, however voluntary payments, such as those made by expats only count for the basic one.
Under the new system, there will be a “single-tier” pension, estimated to be about £144 per week when the changes come in. Transitional arrangements will mean people who paid into a State Second Pension will still get some extra to account for this, however expats, (like the self-employed in the UK) should benefit because contributions made from abroad will count towards the new, higher, pension.
With the paying-in years for a full pension set to rise to 35 from 30, it is important to consider what contributions you have made and if you should consider a top-up, which involves “class 2” contributions if you are working in France, or “class 3 ones” if you are not, the former currently being £2.75 a week and class 3, £13.90.
If you retire after April 2016 and have less than 35 years of contributions, then your pension will be reduced pro-rata. The new rules also provide that no pension is payable if you have fewer than 10 years of paying in. However it is expected that the EU reciprocal pension rules will resolve this problem for people who have spent time working elsewhere in the EU. They state that when working out people’s right to a pension states should take account of years worked in the EU as a whole.
The effect should the UK leave the EU in the future, would depend on new agreements between the UK and France – as would the current arrangements which allow pensioners in France to have their pensions re-evaluated annually, unlike people in countries outside the EU and with no agreements with the UK.
If you know that your record is far from the full 35 years and your UK pension is an important part of your financial planning, it would be worthwhile contacting the pension service to find out about making top-up contributions, whether with annual payments or by direct debit every month. You can also fill in gaps for earlier years.
At present the DWP is advising that people weighing up whether or not to do so may wish to wait until the implementation of the changes in 2016, at which point it will be able to give full estimates of what their current pension entitlements are under the new rules – bearing in mind the extended payment deadlines mentioned below.
You can apply using form CF83, “Application to make National Insurance Contributions Abroad” which can be found at the end of HMRC’s leaflet about Social Security Abroad (see: www.hmrc.gov.uk/pdfs/nico/ni38.pdf).
It requires details relating to work periods in the UK and France and when you left the UK.
Normally if you want to make voluntary contributions this has to be done within six years of the end of the tax year for which the contributions are being paid; however if you pay more than two years after the end of the relevant tax year, “higher rate” rules apply. This means the amount goes up to the highest annual rate between the tax year you are contributing for and the tax year when you pay.
However if you will draw your pension after April 6, 2016 – there are now extensions to the periods.
For the tax years 2006-7 to 2015-16 those considering paying topups have until April 5, 2023 to pay.
There are also extensions to the “higher rate” rules. Until April 5, 2019 the rates payable will remain at the 2012-13 levels if paying for 2006-7 to 2010-11 (2009-10 for class 3), after which “higher rate” rules will not apply until April 5, 2019 (ie. rates will remain at the ones set for the year in question).
Keep track of your different pensions
IF YOU have worked - whether as an employee or as a self-employed person - in more than one country, it is important to keep track of your different pension entitlements.
Even a year or two of paying in is likely to have entitled you to a payment so it is worth making sure the bodies in charge of each pension are updated with your details, for example, if you change address.
In the EU, the pension body of the country in which you live should coordinate your entitlement to state pensions from the EU – the Caisse Nationale d’Assurance Vieillesse if you were an employee in France. If you have never worked in France, it is the pension body for the country in which you last worked.
With work-based and private schemes, note that if you have several small UK personal or workplace pensions (of types where the payout is based on the performance of the fund, not your final salary) if the total value is not more than £30,000, you can cash them in, from the age of 60. This is called a ‘trivial commutation’.
To do this you must have all your pensions valued at the same date - talk to funds’ administrators for this. You can also take up to three pension pots worth up to £10,000 each (though there is no restriction on the number of small pots from occupational pension schemes).
Subject to a consultation which finished last month, further changes are expected from April 2015, allowing all of your pot(s), whatever the value, to be taken as cash.
Financial advisers the deVere Group say last year in a poll of expats more than a third admitted to having lost track of some pensions. In the same year it helped people track down £56million of “misplaced savings”, with the average pot being worth £52,000.