Martin Lewis discusses NI contributions to pension
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In the latest edition of The Martin Lewis Podcast on BBC Radio 5live, financial journalist Martin Lewis urged Britons aged 45 to 70 to check whether they might be able to boost their state pension. With the date to cash in on missed National Insurance (NI) years drawing closer, Mr Lewis told listeners that it was “urgent” to make the check sooner rather than later.
If the following suggestion is applicable, Mr Lewis said it may be possible to turn an £800 payment into a £5,500 top-up on a person’s state pension.
Speaking on the BBC Radio 5live podcast, Mr Lewis said: “Let me take you back to 2016, April 6 … the day they introduced the new state pension.
“For those who hit state pension age after that date – which means pretty much anyone under the age of 70 right now – you have been put on the new state pension.”
He continued: “As part of that, transitional arrangements were put in place. Now, those transitional arrangements end this tax year on April 5, 2023. And that is why there is an urgency for what I’m now about to say. The ability for you to do what I’m about to talk about ends on April 5, 2023.
“This is all about your National Insurance years. The amount you get in your state pension is based on the number of qualifying NI years you have.”
Mr Lewis explained that people acquire National Insurance (NI) years through working. People need to earn over £123 a week to qualify and those who aren’t working due to circumstances such as raising children or having a disability can gain credits.
However, some people miss years of contribution. This can be down to a number of reasons, such as working abroad or having a lower income so they couldn’t qualify for a certain year.
But in order to get the full state pension when a person retires, on the new state pension, Mr Lewis said people will need around 35 years of NI contributions. And it’s possible for people to buy the years they may have missed, which will qualify them for the full rate.
Mr Lewis said: “Anybody listening right now, if you are not yet at state retirement age, go to Gov.UK and look up your state pension summary.
“That will tell you when you are due to get your state pension. It will give you a forecast based on your current National Insurance record of how much you are likely to get.”
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He continued: “For those who are already at state pension age, go and check your National Insurance record, which will tell you how many years of full contributions you have and whether, crucially, you have any gaps in your contribution record.”
The NI record will also break down year by year when and where the person may be missing out.
Mr Lewis said: “This is the crucial bit as to why timing is so important right now. Until April 2023, you can buy back NI years dating all the way back to 2006. After April 2023, you’ll only be able to go back six years. As you can see, that’s a substantial number of years. If you’re missing them, you’ll only have a short window left to buy them.
“Those people who are nearer state pension age, the easier it is to see whether it is going to be worth you buying back extra years or not. The younger you are, the more time you have to plug any gaps, which is why I started this by saying this is for people aged 45 to 70. Although in truth, I think 45 is pretty young – I think 55 is a better age.”
However, the money saving expert noted that before anyone dives into paying for missed years, it’s key to check whether they’re due any free NI credits. People can do this through the Gov.UK website.
Mr Lewis said: “During the period that you were missing years, you may not have got the National Insurance credits that you were entitled to, and you may be able to get them for free, which can substantially boost your state pension.”
Before delving into the numbers, Mr Lewis noted: “I need to give you a really important red flag warning. I am giving you a call to arms about whether you should be checking if this is worth doing but I cannot, in this podcast, give you an absolute guarantee that in your specific circumstance it is worth doing.”
He told listeners that if it looks like it might benefit them, to contact the Government’s future pension centre and get a bespoke calculation. As well as doing the future pension calculation, try and work out if it will make the person fall short with other benefit entitlements.
For example, if a person is entitled to Pension Credit and paying for this would diminish it, it may not be worth it, or buying the extra units might push the person into a higher tax bracket, which could limit the returns they’ll get on the money.
However, he said: “In general, most people are better off doing this… but you need to check it out in your own specific circumstance and while the future pension centre won’t be able to go through everything with you, it will at least be able to give you a bespoke calculation for the basic circumstances.”
Speaking on why this is such an important analysis to carry out, Mr Lewis said: “A voluntary National Insurance year costs about £800, but it adds £275 a year to your state pension. This means, the break-even point, is if you live just three years after the state pension age.
“Or if you’re already at the state pension age, if you live just three years after buying the extra year, you’re even.”
Mr Lewis provided two examples to substantiate the claim. Looking at life mortality spans, a man who reaches age 66 would typically live 19 more years. If that were to happen, each £800 paid would be £5,300 extra on their state pension.
A woman who lives to age 66 would typically live 21 more years, so each £800 paid would then be £5,800 extra on their state pension.
Mr Lewis added: “The amount you get in the pension also, normally, has the triple lock – it goes up with inflation or average earnings or 2.5 percent, so this is inflation-proof too.
“So, if this is right for you and you’re missing a gap and you’re not going to make it up another way and you have the money to do this, then spending £800 to boost your state pension – unless you have a very short life expectancy after doing it – is odds on to be an incredibly lucrative thing to do with your money.
“If you want to buy those years, first of all, check if you’re able to get free national insurance credits… and get a bespoke calculation from the future pension centre. Don’t do it without, because once your money’s in there, it’s done.”
People can listen to The Martin Lewis Podcast on BBC Sounds, here.
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