Pension top-up costs rise five-fold

The change comes after the UK government opted to press ahead with previously announced plans to abolish the lower rate Class 2 voluntary National Insurance Contributions (NICs), without providing a replacement mechanism for working expats who were paying them.

They will instead be required to pay the more expensive Class 3.

An HMRC spokesperson said the change still “represents excellent value for the individual” because “the actuarially fair value for a year of new state pension is considerably higher than a year of Class 3 contributions”.
The term ‘new state pension’ refers to pension reforms as of April 2016, with a new ‘single tier’ pension worth more than the former basic one but with the ‘state second pension’, which some UK-based workers built up, being abolished and paying-in duration extended from 30 to 35 years.

When asked to comment about the dramatic rise for expats, the UK Treasury said: “To simplify the complex national insurance system for over 3 million self-employed people the government announced that it would abolish Class 2 NICs and give access to contributory benefits through Class 3 or Class 4 NICs.”
The proposal to abolish Class 2 was subject to a consultation which closed in February 2016. Some expats contributed their opinions on the proposed rise. The government has published a response paper in which it implies working expats have not been paying a ‘fair’ amount.

The paper justifies the rise by stating that some working people in the UK already pay Class 3 (this, however, only applies to people earning less than £112 a week, who, like early-retirees, do not accrue pension rights unless they opt for voluntary Class 3 payments).
It says this therefore means working expats “are currently paying much less than UK workers to gain access to the same state pension on a voluntary basis” and “the government believes it is right that everyone makes a fair contribution towards the state pension, so the facility for those working abroad (and who are not UK-insured) to pay Class 2 NICs voluntarily will no longer be available after the abolition of Class 2 NICs.”
In the UK, employees earning more than £112 a week pay Class 1, at variable rates depending on earnings, and self-employed people usually pay Class 4, which are also variable. Class 2 is paid at a fixed rate by some lower-earning self-employed people and Class 3, also fixed, is paid (on an optional, voluntary basis) by early-retirees or some people with part-time jobs.
Under the reforms all self-employed people in the UK will pay Class 4 as of spring 2017-18.

An HMRC spokesman said: “Expats that have UK profits or UK earnings above about £6,000 a year may not need to pay Class 3 as they would access benefit through Class 1 or Class 4.”
At present, to qualify for Class 2, expats need to be working and to have been working in the UK before they came to France.

To pay voluntary NICs at either level, expats must also have previously lived continuously in the UK for at least three years or paid three years of NICs contributions in the UK. If you lack years for a full UK pension (now 35), and you qualify, you may wish to look into making voluntary payments for missing years up to the current one (UK tax year 2016-17) and then for the year 2017-18, before Class 2 entitlement stops.

The consultation document (tinyurl.com/consult-nic) says nothing will change with regard to people’s ability to make voluntary payments for the 2017-18 tax year and earlier.
Normally, you must make voluntary contributions for a given year within six years of the end of the UK tax year for which they are being paid, but there are currently extensions in place for years from 2006-7 to 2015-16 (see gov.uk/voluntary-national-insurance-contributions and the sections on ‘rates’ and ‘how and when to pay’) up to spring of 2023. The usual six-year extension applies again to 2016-17 and 2017-18, meaning that for the final year of Class 2 contributions, 2017-18, the deadline will be April 5, 2024.

The usefulness of top-ups will partly depend on what pension rights you have already built up – to establish this see gov.uk/check-state-pension.