A Guide for Those Aged 40-73

The UK State Pension is a vital source of income for many retirees. However, there is an impending deadline which is important to be aware of. This blog post will break down everything you need to know about the upcoming deadline for making National Insurance (NI) contributions, how it could affect you, and how you could potentially boost your retirement income by thousands of pounds.

Who Does This Apply To?

This information is specifically relevant to those born after 5th April 1951 (men) or 5th April 1953 (women), as they are eligible for the New State Pension. If you were born before these dates, you are on the Old State Pension and this information does not apply to you.

Understanding the Basics

The full New State Pension currently stands at £11,502 per year. For a couple, this equates to £23,004 per year. It is currently protected by the ‘triple lock’ which guarantees that each year it will rise by the highest of these 3 figures: average earnings, inflation, or 2.5%. This protects the State Pension from losing value over time. No matter your level of wealth, it can be an extremely beneficial source of guaranteed income to support your retirement planning.

The State Pension currently starts at age 66, and will rise to 67 in 2028. To qualify for the full State Pension, you need 35 qualifying years of NI contributions. To receive any entitlement to the State Pension, you need to have a minimum of 10 qualifying years of NI contributions.

What’s the problem?

Not everyone is on track to have made 35 years of NI contributions, which means that not everyone will receive the full State Pension. Many people have gaps in their NI record which can arise for various reasons: taking time out of work to raise children; living abroad; or being contracted out of the State Pension scheme.

What if I have gaps in my NI record?

The good news is that you can often fill these gaps by making voluntary NI contributions. However, there is a vital deadline to be aware of: 5th April 2025. Before this date, you are able to make contributions for missing years going back as far as 2006. After the deadline, you'll only be able to go back six years, meaning some people may never be able to achieve the full State Pension. This could have enormous ramifications if you have numerous missing years.

Should I make voluntary NI contributions before 5th April 2025?

This will depend on your individual circumstances.

Below we have outlined who may benefit from making additional contributions. From a value-for-money perspective, if you are in this category then there are not many opportunities to get a better return on your money.

The cost of buying back missing years varies depending on the year, what you were doing in that year, and whether any level of NI contributions were paid. The maximum cost for a qualifying year between 2006 and 2012 is £824.20. For every year you buy back, you add 1/35, or £328 to your annual State Pension. This means you'd only need to receive your pension for around 2.5 years to break even on your investment. To put this into context, a 60-year-old woman in the UK has an average life expectancy of 87. With an average life expectancy, she should receive her State Pension for 20 years. This means that her total return on her contribution of £824 would be £6,570, or around 788%, not accounting for the further inflationary increases which would be received.

A Golden Opportunity – But Proceed with Caution

This is a significant opportunity for many to boost their retirement income. However, it's essential to proceed with caution and do your research. While some people stand to benefit enormously from taking action before the deadline, others might be worse off. If you are on track to receive 35 years anyway, there is no benefit to you making additional contributions as you will not see this money again.

Some steps to follow:

• Check your State Pension forecast: This will tell you how much State Pension you're projected to receive.
• Review your National Insurance record: Identify any gaps in your contributions.
• Assess your situation:
  • If you have no gaps, there's nothing to do.
  • If you have gaps but expect to earn enough in the future to fill them, making voluntary contributions might be a waste of money.
  • If you have more gaps than you expect you’ll expect to earn naturally through employment, keep reading.
• Prioritise which years to pay: If you have several gaps, start with the cheapest years first, then prioritize the earliest years. Keep the gaps within the last six years until last, as you can address these later (though they will likely become more expensive over time).
• Be aware of rising costs: The cost of voluntary NI contributions increases with inflation each year. Until April, however, the cost for the older years has been frozen, which is why this deadline is so important.
• Consider the risks: If you die before reaching State Pension age, you may lose some of the money you've invested in voluntary contributions. Waiting and only making six years’ worth of contributions before retirement could mitigate this risk. Be aware that the price for each year will likely be significantly higher than it is now.
• Research thoroughly: Read guides from reputable sources like the MoneySavingExpert and GOV.UK. Our colleague James Shack has also released a comprehensive video on the subject on his YouTube channel.
• Contact the Future Pension Centre: If you have any questions or need further clarification, don't hesitate to contact the Future Pension Centre.

Looking Ahead

It's important to remember that the government could change the rules regarding State Pensions in the future. There’s no guarantee that the State Pension will remain in its current form in 20 or 30 years. If you unsure of what to do personally, feel free to ask your Nova Wealth adviser or get in touch with us here.

Capital at risk. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. We do not provide tax advice. Any examples used in this article are for illustrative purposes only and you may get less back than the figures shown. This article does not constitute personal advice. We do not take any responsibility for third party websites and content we may link to from this article. Issued on behalf of Nova. Nova is a trading name of Nova Wealth Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN: 778951) and is a limited company registered in England & Wales (10739796).