People hoping to boost their pension income by thousands of pounds over their retirement can breathe a sigh of relief – after a government scheme was extended by almost two years.
HM Revenue and Customs has announced that taxpayers now have until April 2025 to fill in gaps in their national insurance so they can get the full state pension – a boost that will be particularly welcomed by women who took time out to raise a family, carers, and those who have worked abroad.
Under the scheme, someone investing just over £8,000 could end up seeing their state pension payments increase by more than £60,000 over their retirement.
But anyone thinking of filling their gap years has been warned to do their research so that they know they are making the right decision.
Plugging the gaps
In order to qualify for a full new state pension, which is £203.85 a week, you typically need to have a 35-year history of paying national insurance contributions.
However, many people have gaps in their record, which means they will not get the full amount. This could be someone who takes time off in their career to look after children, or members of their family, or who lived abroad for some time.
Under the rules, you can pay extra to fill in gaps, but this usually only extends to the previous six years. But under the government extension scheme, you can fill them in for any year from 2006.
This opportunity was due to end next month, but HMRC has announced – amid claims of lengthy delays in the system – that taxpayers have until April 2025 to take advantage of the scheme. But it only applies to people who have reached state pension age after 5 April 2016.
To do this, you need to pay voluntary class 3 NI contributions of £15.85 a week, or £824.20 a year. This one-off payment can add up to one-35th of the full rate to your eventual state pension. A boost that is worth £5.82 a week, or £302.86 a year.
Steve Webb, former pensions minister who is now a partner at the actuarial business LCP, says that in the case of someone who wanted to top up 10 years of contributions, they would have to give £8,242 (10 lots of £824.20) to the taxman. And, for that, they would get an annual boost of £3,028 – or just over £60,000 over a 20-year retirement.
Breathing room
The substantial extension was announced last week, with HMRC saying tens of thousands of people had already chosen to make additional contributions.
Victoria Atkins, financial secretary to the Treasury, says it will allow people to take some time to decide whether it is right for them, and also to spread the costs.
The shift has been broadly welcomed by the financial services industry, with many referring to reported problems with processing existing requests.
Alice Haine of Bestinvest says: “The good news is that Britons with gaps in their national insurance record no longer need to panic about running out of time to make up a gap and receive the full pension income they are entitled to.
“Buying back missed years is a great way to bolster retirement income, with this window of opportunity to backdate contributions all the way to 2006 is something not to be ignored.”
Jon Greer of wealth management company Quilter says that about 193,000 people a year make the top-ups. “This will hopefully help avoid any further logjams for the government, and more people can take advantage of what can be a very valuable bit of retirement planning.
“Ultimately, this represents a golden opportunity, and people should not squander it.”
Is it right for you?
That the scheme is in place and extended does not necessarily mean it is right for everyone. Webb says it is important for people to talk through their options with the Department for Work and Pensions.
“This is complex, with great potential for people to improve their position, but also the risk that they may get things wrong,” he says.
“It is essential that people can talk through their options with the DWP, and this has simply been impossible for too many because of lack of phone capacity.”
HMRC says that paying additional contributions does not always increase the state pension. Taxpayers can get a pension forecast at gov.uk or see if additional contributions are worth it.
But Webb says the site does not specify which years a person should fill, and includes prices for years that the individual should not fill because it would not boost their pension. “This is why it is vital for people to discuss their individual record with the [government’s] future pension centre,” he says.
Haine says that whether someone needs to top up depends on how many more years they will work. “Those aged 45 and over, who won’t have enough time to achieve the 35 qualifying years needed for the full new state pension, may be more inclined to pay up, while someone close to retirement and in poor health might not feel it is worth it.
“For younger people, it may not be worth the expense of filling the gaps, as they are more likely to hit the required contribution target.”
People who live longer are more likely to profit more from increasing contributions. Tom Selby, of investment platform AJ Bell, says: “That income will be protected by the ‘triple lock’, meaning it rises every year by the highest of average earnings, inflation or 2.5%.
“In April this year, the state pension increased by a whopping 10.1%, in line with inflation in September 2022. Broadly speaking, anyone who increases their state pension on these terms will need to live three to four years in order to be in ‘profit’ from the deal.
“Those in good health who can boost their state pension could benefit handsomely by doing so.”
