Buy extra pension years to boost flat state pension?
|Retirement | State Pension
Asked by momist, submitted
16 April 2013.
I have just been talking to the pension service about my wife's state pension prospects. She is one of those who now (just) falls into the new flat rate zone starting in 2016. As she is four years short of the current required NI contributions, she would have got 26/30ths of the basic pension, representing a shortfall of £380/year. Now, she should get 26/35ths of the new flat rate, representing a shortfall of nearly £1500/year. As you can imagine, we're not happy about that, even if it is slightly more than she might have got, if inflation rises meanwhile are taken into account.
However, the pension service will not suggest we buy nine years (some yet to come) of voluntary contributions, as the legislation has not yet been passed by parliament. I am considering buying four years of past NI and waiting for the legal position to be clear before committing to any extra.
Do you have an opinion on when that might happen please?
Answered by Justin on 13 August 2013
The Government's flat state pension proposals assume a £144 state pension for 35 years of service versus a current £107 basic state pension for 30 years of service (note: the £107/£144 are based on the last tax year). Ignoring inflation up to 2016 and assuming your wife has not contracted out or will receive any SERPS/S2P benefits, then she should be around £13 per week better off under the new scheme if it sees the light of day.
The rules for plugging gaps in National Insurance Contribution (NIC) records allow you to make voluntary NICs for any given tax year with a shortfall within six years of the end of that tax year.
It is proposed to extend this for those who reach state pension age on or after 6 April 2016, giving them until 5 April 2023 to make voluntary contributions for the tax years 2006/07 to 2015/16. These contributions will be at the 2012/13 rate of £13.25 per week for contributions based on the 2006/07 to 2010/11 tax years if paid by April 2019.
The flat state pension proposals (called the Pensions Bill) is currently going through Parliament and due to see the light of day (i.e. gain 'royal assent') during Spring 2014, you can track progress here.
Given your wife will very likely benefit from making voluntary contributions I would seriously consider making them assuming she has NIC gaps over the last 6 years. If she makes contributions for a previous year it will normally be at the rate which applied that year, unless more than two years ago in which case current rates usually apply.
Since she'll seemingly have until her retirement date to make up any shortfalls over the last six years (at the 2012/13 rate) there is arguably no need to rush the decision - assuming of course the proposals all go ahead in their current form.
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Readers' Comments (2) - To post a comment please register or login
Comment by SnowMan at 11:31am on 02 Sep 2013:
The HMRC information on the class 3 extension is slightly ambiguous for 2010/2011 and 2011/2012. I had read it to say that for those retiring under single tier, purchase of the 2010/2011 and 2011/2012 years before 6th April 2019 would be at the 2010/2011 and 2011/2012 rates respectively not at the 2012/2013 rate for both years.
I emailed the HMRC contact Hasan in the tax information and impact note on the HMRC website ‘Revised time limits and higher rate provisions for the payment of voluntary National Insurance contributions for those reaching State Pension age on or after 6 April 2017'.
He replied by email with a very clear answer straight away
'I can confirm that for a person who reaches SPA after 6 April 2016 and so will receive a Single Tier Pension the time limits for paying voluntary contributions and the higher rate provisions will be modified.
They will be allowed to voluntary contributions from the 2006-07 to 2015-16 tax years inclusive up to 5 April 2019. The rates payable for the 2010-11 and 2011-12 will be the rates that applied for those years i.e. £12.05 and £12.60 respectively.'
That would suggest that for those retiring under single tier, delaying payment for 2011/2012 is OK as the rate of £12.60pw will apply up to 5th April 2019.
Also the rate for 2010/2011 in these circumstances will be £12.05pw for 2010/2011 if purchased by 5th April 2019 and not £13.25pw..
Comment by justin at 11:50am on 05 Sep 2013:
Thanks for the feedback. I had based that part of my answer on the following HMRC para:
"for voluntary Class 3 contributions, if you make a payment by 5 April 2019 you will pay the contributions at the rate that applied in 2012-13 tax year for the tax years 2006-07 to 2010-11"
Having emailed HMRC I received the same reply as you, so looks like the 2 year rule mentioned in my answer applies, hence 2010/11 and 2011/12 rates will be lower as you mention.
Many thanks for pointing this out, I have amended the sentence concerned in my answer.