Act now to boost your pension
There are just a few days left to take advantage of an inflation-proof pension top-up plan, aimed at people who are already claiming a state pension or who will be claiming one by April 5, 2017.
The cost depends on a person’s age and how much extra they want. For example a person aged 65 may pay a £890 lump sum (called Class 3A NIC) by April 5, 2017, for an extra £1 per week while for an extra £25 per week the sum payable is £22,250. The cost reduces for older people.
Further details can be found at:
However, if you have gaps in your pension record it may be more beneficial to make voluntary class 2 or 3 NICs for missing years before considering the new scheme.
In most cases surviving spouses and civil partners will be able to inherit at least 50% of the extra pension under the class 3A scheme. The boost will be index-linked so the extra income will under current rules increase with inflation for people resident in the EU and EEA and certain other countries with which the UK has a social security agreement (eg. the USA).
The cost of making such a ‘top up’ is based on your age and average life expectancy. While the amounts may sound high, the Institute of Fiscal Studies has calculated that the offer is good value for money compared to funding extra income through an annuity with an insurance company.
The UK government advises that people should get in touch with the pension service to find out if it will benefit them.
It says it may be especially interesting to those who are not entitled to a large state pension.
Separately from this one-off class 3A scheme, voluntary class 3 NICs can be paid to ‘top-up’ missing contribution years, both before and after taking the state pension (those working in France and not yet claiming a state pension may under certain conditions be able to pay the cheaper class 2). This may be of interest for those lacking the full usual payment years for a state pension and for whom their UK state pension is an important part of their financial planning. This can be done with annual payments or by direct debit every month. You can also fill in gaps for earlier years. As a first step, obtain a state pension forecast. This can be done at gov.uk/check-state-pension
The UK state pension changed to a new ‘single-tier’ system as of April 6, 2016, replacing the former system which included a basic state pension, plus a second state pension (‘S2P’)which many UK workers accrued.
Transitional arrangements were introduced for people who reached state pension age (SPA) after April 6, 2016, but had built up a NIC record before that date. However, these are complex and whether or not it is in your interests to pay voluntary NICs depends upon whether or not the state pension that you had built up under the old system, as at April 5, 2016 (known as your ‘starting amount’) was more or less than the single-tier pension amount at that date, which was £155.65 per week. The starting amount includes both basic state pension built up by the changeover date, plus any second state pension built up.
Hence, for people who were ‘contracted in’ to S2P and so paid higher rates of NICs, the additional pension could be a substantial part of their starting amount.
On the other hand, for those who were ‘contracted-out’ for long periods, the starting amount is likely to be less than the single-tier pension.
You will not get less than your state pension entitlement as at April 5, 2016 and so:
If your starting amount was more than £155.65 per week, you will receive the new flat-rate pension and you will also receive the amount above this as a ‘protected payment’, which will increase by the rate of inflation. You will not be able to build up any more state pension and so there is no point in paying anymore voluntary NICs, even if you have less than the full 35 years of NIC record.
If your starting amount was equal to £155.65, you will get a pension at the standard new single-tier rate. You will not be able to build up any more state pension and so again, there is no point in paying any voluntary NICs.
If your starting amount was less then you can (until you reach SPA) continue to build up your pension to the new flat-rate amount by paying voluntary NICs.
Note that class 2 NICs are to be abolished from April 6, 2018.
Moving forward, expatriates would all pay class 3 NICs and the 2017-18 rate is anticipated to be £14.25 per week (though there will still be the possibility to top up earlier years at class 2 rate for those who qualify).
Class 3 are much more costly than class 2, but financial experts say that paying them may still represent good value for money in terms of the extra pension acquired.
This is an edited extract from our new 2017 pensions guide. You can order a copy, printed or pdf version, for €9.50 (+P&P) at here.