Former Pensions Minister and This is Money columnist Steve Webb has launched a new website to help savers through the tax process of buying state pension top-ups.
Making voluntary contributions can give a huge boost to retirement income, but people are often confused about whether it will be worth it based on what they’ve already paid, and whether it’s the years to fill in or buy from scratch.
Webb, now an LCP partner, says the new site aims to help people “decode” the information they get on their National Insurance record on the government site and figure out if it makes sense to complete their public pension.
State pension top-ups: Steve Webb launches website to ‘decode’ how to boost retirement income
When Webb appealed to help him test the site in a recent weekly column This is Money, which discussed the possibility of buying top-ups after retirement age, he received a deluge of offers from readers willing to help.
Many said they wanted to know if buying refills would benefit them, but they did not know how to solve this on their own and were mystified by the official information available.
>>> Find out below how a 65-year-old This is Money reader found out he could pay £4,000 to boost his pension by £28 a week
This is Money and our sister publication Money Mail have in the past called for an overhaul of state pension top-ups after receiving numerous complaints about the confusing and chaotic system.
We’ve covered numerous cases of savers who innocently bought worthless top-ups and were initially refused refunds before HMRC backed down.
More recently, we have reported cases of savers who paid thousands of pounds and watched their money disappear without explanation for months, until This is Money intervened.
How much does it cost to increase your retirement pension?
“At best, supplementing your public pension can be a very cost-effective way to secure a higher income in retirement,” says Webb.
A year of voluntary National Insurance contributions usually costs £824.20 at the current ‘class 3’ rate, he explains.
“In many cases this will increase state pension entitlement by 1/35th of the standard rate, or around £275 a year.
“That means someone who completes a year will get their money back within four years of withdrawing their pension, even taking into account the basic tax rate.”
Webb says someone who collects a state pension for 20 years will recoup £4,400 (net of basic tax) on an initial outlay of £824.20.
Meanwhile, some people have waited months for confirmation from the Department for Work and Pensions of which years to buy, how much and how to pay.
Webb says the government’s ‘check your state pension’ website provides useful information but mostly doesn’t help people decide which years, if any, they should complete.
The new LCP website helps fill that gap for those under the “new” state pension system launched in April 2106 – so men born on or after April 6, 1951 and women born April 6, 1953 or after.
It works as follows:
– Users are advised to first obtain information about their personal NI record from the gov.uk website
– They are asked for basic details about their age and what they say about this record – this is not kept by LCP
– The site then interprets this information to explain to users their options
– Users are warned that they should always check with the Department for Work and Pensions that the top up of the identified years will certainly increase their state pension before paying out any money.
Webb notes that there is usually a six-year deadline to fill historical gaps in NI records, but a temporary extension is in place that allows people to do this until 2006/07 – a concession that expires on the 5th April 2023.
He says that in some cases the LCP site will simply confirm what users have already concluded, but he hopes this will help others discover the potential of top-ups – and adds that This is Money readers who took part in early testing gave positive feedback.
Since 2016, purchases of voluntary top-ups to improve state pensions have increased significantly, with half a billion pounds paid for voluntary NICs over the past four years.
And Webb predicts this year will likely be another record high, due to the April 2023 deadline to close old gaps.
>>>Go here for Steve Webb’s Golden Rules for Buying Refills, and see below.
Source: Government Actuary’s Department, National Insurance Fund accounts (various years)
Webb adds that there are two groups for whom refills may be of particular interest. First, civil servants who took early retirement and were members of a contracted occupational pension scheme that reduced their state pension below the maximum amount.
And second, self-employed people who may have gaps in their NI record and can go back to any year since 2006/07 to complete it.
His other tips include:
– Some years may be “cheaper” to top up than others, for example if you worked for part of the year and paid NI
STEVE WEBB ANSWERS YOUR RETIREMENT QUESTIONS
– Filling in blanks for certain years – notably those before 2016/17 – may sometimes have no impact on your state pension, particularly if you were under contract and already paid in 30 years in April 2016
– People who expect to receive benefits in retirement may find that their increased state pension is clawed back in the form of a reduced pension credit or housing allowance
– Self-employed people can save money by paying voluntary class 2 contributions (currently £163.80 per year) rather than class 3 contributions (£824.20 per year)
– Before buying refills, check if you can claim free NI credits for a given year, for example to be a caregiver or look after grandchildren.
I increase my state pension by £28 a week to £4,000
Retired local government worker Brian Moore, 65, from Birmingham, has been ‘contracted out’ of the State Earnings Related Pension Scheme (SERPS).
There was a deduction from his state pension to account for this, and he was to receive considerably less than the current full flat rate of £185.15 a week.
The This is Money reader volunteered to test Webb’s new site a few weeks ago and discovered that a period of caring for his elderly father resulted in NI credits in his account, giving him “partial years” of contributions for two fiscal years.
By paying top-ups only for the missing weeks of those years, he could add full “qualifying years” to his record at a lower cost.
Once this was factored in, Mr Moore found he could boost his future weekly payments by £28 per week by paying a lump sum of around £4,000.
He contacted DWP’s Future Pension Center to check the figures and then HMRC to arrange payment.
Mr Moore says: ‘Many of my friends had no idea how their state pension was increased through voluntary contributions.’ I encourage everyone to check where they stand to see if they can benefit from these rules as well.
Millions of people could have received state pensions which were not sufficient
The government admitted that a decades-old computer system had caused overpayments or underpayments of progressive retirement benefits, a top-up inherited from the basic state pension.
The errors were all under 10p per week and 98 per cent were 1p or 2p per week, he confirmed.
DWP officials decided in 2002 that it would be too complicated to solve and a solution has still not been found, according to a BBC article by social affairs correspondent Michael Buchanan, which revealed the problem.
Former pensions minister Steve Webb, who was not told about the blunders while in office, urged the government to ‘be clear’ now and wondered how many other mistakes are just ‘swept under the rug’ and never admitted.
“It is amazing that the DWP can decide that it is simply not worth correcting systematic errors in state pension payments dating back decades.” he says.
“While the errors are generally small, this could have repercussions, perhaps wrongly depriving some people of much larger amounts in means-tested benefits such as pension credit.
A DWP spokesperson said: “Our priority is to ensure that every retiree receives the financial support to which they are entitled and that most graduated retirement benefit allocations are correct.
“Where they are not, the vast majority of overpayments and underpayments are 1p or 2p a week and we are looking for solutions to this problem which has occurred under successive governments.”
It’s Money and Webb previously found elderly women were underpaid by a billion pounds in a scandal affecting tens of thousands of people who reached a state pension before 2016.
Webb recently discovered a separate error, where women who had been entitled to their state pension since 2016 are wrongly denied one, is still happening despite the DWP being aware of it since 2019.
TOP SIPPS FOR DIY PENSION INVESTORS
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.