Making voluntary national insurance contributions could increase the value of your money by 587%. Few other “investments” can match this, although it’s not good for everyone.
Times are tough for anyone relying on the state pension, as its value is set to fall in real terms as the cost of living soars.
The new state pension only increases by 3.1% on April 6, raising it by £5.55 to £185.15 a week, assuming you receive the full amount.
In real terms, this represents a reduction of £7.45 per week, or £388 per year, with inflation expected to reach 7.25%.
Those who retired before April 6, 2016 on the old state pension will receive a maximum of £141.85, just £4.25 more.
This makes it all the more important that you get the maximum entitlement, which requires 35 years of National Insurance (NI) contributions for the new full state pension, or 30 years for the old one.
There are two options if you have a shortfall. The first is to claim NI credits to cover any time you were unable to work and claimed benefits such as in-work tax credits, Jobseeker’s Allowance and Universal Credit, or raised a family or acted as a caregiver.
Andrew Tully, technical director of Canada Life, said these should have been given automatically. “If in doubt, check, as they may be backdated.”
In some cases, people must actively claim NI credits, including those on Caregiver Allowance who work 20 to 35 hours a week.
If you don’t qualify for NI credits, you can fill in the gaps in your contribution record by making voluntary Class 3 NI contributions instead, says Becky O’Connor, head of pensions and savings at Interactive. investor.
You have to pay for it, but she says, “It’s still worth looking into because the return on investment can be amazing.”
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NI Class 3 voluntary contributions can fill the state pension shortfall for those who were working but had low incomes.
They can also make up the shortfall for the unemployed who did not apply for benefits and the self-employed who did not contribute because they made only small profits.
Those who live or work outside the UK could also boost their state pension in the same way.
Class 3 voluntary payments cost £15.40 a week, which works out to £800.80 a year, says O’Connor. “Each additional qualifying year you generate will add 1/35th of the state pension, which on the new state pension is around £5.29 a week from April 6, or £275.08 £ per year.”
That gives you £825.24 over the first three years, meaning you’ve effectively got your money back. “Over a typical 20-year retirement, you could get £5,501.60 in extra state pension in total. That’s an incredible 587% return.”
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However, it depends on how long you live after collecting your state pension. Those who die relatively early will get a lower return, meaning those in poor health should think twice before buying an extra pension.
There are also limits to the amount of additional state pension you can purchase, O’Connor says. “You can generally only make voluntary payments from NI for deficiencies in the previous six years.”
Visit the Gov.uk government portal to check your NI record, see if you are eligible to make voluntary contributions and how much it will cost. Or contact the Future Pension Center on 0800 731 0175.
Be warned, buying additional years could backfire if you lose other state benefits as a result. If you have a low income in retirement, check your eligibility for pension credit instead, which increases the income of a single pensioner to £177.10 a week or £270.30 a week for couples.
You don’t have to pay anything to get the pension credit, but a million of the poorest pensioners don’t claim it.