Paying additional state pension

Topping up your State Pension

If you’re looking to maximise your income in retirement, a good place to start is with your State Pension. If you’re not getting the full amount or are not on track for it, then it’s worth considering topping up. The cost of doing this is effectively subsidised by the Government which means it can be very good value for money.

The amount of State Pension you get is based on your record of National Insurance contributions (NICs). If you haven’t made enough contributions, then you won’t get a full State Pension. But you may be able to pay voluntary contributions to boost the amount you get, even if you’ve already retired. 

Class 3 NIC are voluntary National Insurance Contribution made by yourself. The cost of voluntary Class 3 NICs for the current year of 2018/19 is £14.65 per week (This varies dependant on the year). This means it costs up to £762 to buy an extra qualifying year of NICs. This would boost your State Pension by 1/30 of the full rate so you’d get an extra £4.20 of State Pension every week or £218.31 a year. Given that it costs a one-off lump sum of no more than £762 to buy extra pension of £218.31 a year, it would only take 3 years and 4 months of receiving higher State Pension to recoup this cost and you would continue to receive this extra pension for the rest of your life.

Let me try simplifying this by working through an example with you;

Jack is still in paid work and will reach State Pension age of 66 in the early 2020. A few years ago, he took a break from work to go travelling with his family and as a result he has a gap in his NI record for 2014/15. He has visited the ‘Check your State Pension’ website which says that his starting amount for the new State Pension is £150.26. This is based on 32 qualifying years out of a maximum of 35, so is 32/35 of the full flat rate of £164.35. 

He has worked through 2016/17 and 2017/18 so has built up two extra qualifying years (taking his total qualifying years to 34/35) but will run out of time to reach 35 qualifying years from post-2016 contributions before he reaches State Pension age. 

Jack therefore decides to top up his NI record for the year 2014/15 at a cost of £13.90 per week or £722.80 for the full year. This increases his starting amount to 35/35 qualifying years and he will be in receipt of the full State Pension of £164.35.

The table below reflects the relative gain Jack has made from his 2016 starting amount in comparison to making the additional voluntary contributions and adding the extra 2 qualifying years through employment in 2016/17 and 2017/18;

£ Per Week	Pension before paying voluntary Contributions	Pension after making voluntary contributions
2016 Starting amount	£150.26	£159.65
Final State Pension (Including 2017/18 and 2018/19 qualifying years)	£159.65	£164.35

This illustrates from a starting Pension amount of £150.26, Jack has increased his income by an extra £9.39 per week or £488.28 per year by making the additional voluntary contributions. This is payable for the rest of Jacks life. 

By the time Jack is 69 he will have recouped that additional payment of Class 3 NIC contributions he made of £722.80 to top up his NI record for the year 2014/15.

To add some context to these figures, if Jack was to live to the UK life expectancy of a Male which is 78, he would be set to be an extra £4394.52 better off in retirement. Moreover, given the same circumstances, his twin sister Jaqueline, living to the UK life expectancy of a Female of 83, would stand to be £6835.92 better off in retirement.

The rules for topping up your State Pension are complicated. But, as the example demonstrates, if you can afford to make voluntary Class 3 NICs, the rewards can be large relative to the cost of doing so.

We hope this information has helped you make sense of the rules and that you now feel in a position to make a more informed choice about whether or not to top up your State Pension.

How do you go about making these additional voluntary NI contributions?

There are a variety of ways including sending a cheque through the post, paying at your bank or building society, paying online or over the phone or monthly via Direct Debit. 

You can find more details at – https://www.gov.uk/pay-voluntary-class-3-national-insurance