The state pension system underwent changes on 6 April 2016 to make it simpler to determine how much state pension you are entitled to receive. The maximum amount currently is £185.15 per week, but the amount you’ll receive depends on the number of qualifying national insurance (NI) years you have.
Usually people will need about 35 full qualifying years of NI contributions to be entitled to the full state pension, though for those who started their NI record before 2016 (which is most of us) – it’s not quite that simple. The amount of years you need is based on your age and NI record up to now – which for some could mean you need more than 40 years of NI contributions!
Transitional arrangements are in place until 31 July 2023, allowing you to purchase National Insurance credits going back as far as 2006, which will boost your entitlement to the state pension. However, after this date, you can only purchase credits going back six years, which could result in the loss of potentially valuable contributions.
Why this may impact you?
Missing qualifying years could have a significant impact on your entitlement to the state pension. National Insurance credits are gained when you pay National Insurance through employment or self-employment earnings, or by claiming certain benefits such as child benefit. However, property income, dividends, and other investment income do not qualify for National Insurance.
What do you need to do?
To determine your State Pension forecast, the first step is to check the Government website at https://www.gov.uk/check-state-pension. You’ll need a Government Gateway account to access it, and it will ask for identifying information such as passport or driving licence numbers and questions relating to your credit history. The forecast will indicate the amount of State Pension you’re entitled to receive based on your record to date and how much you’re likely to get if you work up to State Pension age.
If the forecast shows that you’re not predicted to receive the full state pension, it’s worth considering purchasing qualifying years of National Insurance to boost your entitlement. Even if you’re predicted to receive the full state pension based on working up to State Pension age, it’s worth considering topping up anyway if you plan to retire sooner.
How much could this be worth?
Purchasing a National Insurance year costs approximately £824, and each year adds up to £275 per year to your pre-tax State Pension. Therefore, if you have gaps that you’re not likely to fill by working in subsequent years, you’ll benefit from purchasing gaps, provided that you survive at least three years past the State Pension age.
Determining your entitlement to the state pension can be complicated, and there’s no one-size-fits-all approach. It depends on your specific situation both historically and your plans for the future.
We recommend that everyone checks their State Pension Forecast, and if you need further assistance, please contact us for bespoke advice on what you should do and the consequences of doing so.