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Retirement planning: Mind your National Insurance gaps
Among the milestones that define your later years, reaching pensionable age is one of the most significant.
For those who have not already left the world of work behind, it can officially mark the transition into retirement and the chance to begin a new phase of life. By definition, it can also open the door to a stream of income via the State Pension.
It is important to note, however, that there are no absolute guarantees. The new State Pension is not a fixed amount, universally distributed to anyone who reaches pensionable age. Indeed, whether you qualify and how much you will receive directly depends on the number of ‘qualifying years’ of National Insurance contributions (NICs) that you have accrued.
The new State Pension was introduced on 6 April 2016. To get any State Pension at all, you need to have at least ten qualifying years on your National Insurance record. These do not need to be recorded consecutively.
To qualify for the full State Pension amount, you generally need to register 35 years’ worth of NICs on your record.
This is typically achieved through the payment of NICs while in employment, but it is also possible for contributions to be credited to you in certain situations where you are unable to work.
Where there are gaps in your record, they can be plugged by paying voluntary National Insurance contributions for the years missed. However, the window for paying back certain years is closing, potentially leaving some people unable to make the voluntary payments and, therefore, facing a shortfall in their expected pension income.
In this article, we explain how to find out if you’re affected and what you can do about it before the deadline.
Note: The following information is relevant to men born after 5 April 1951 and women born after 5 April 1953.
What is changing?
Individuals currently have the opportunity to plug historic gaps in their National Insurance record between 2006 and 2016 under what are known as transitional arrangements.
These transitional arrangements were originally scheduled to cease at the tax-year end on 5 April 2023, but with many people struggling meet the deadline, the government granted an extension to 31 July 2023.
This means that from 1 August 2023 you will only be able to plug gaps in your National Insurance record stretching back six years rather than all the way back to 2006, reducing the number of qualifying years that you can potentially add to your record through voluntary payments.
Why does it matter?
Without sufficient qualifying years, you will not be eligible for the full State Pension. Particularly for those close to retirement age, therefore, the change could jeopardise their ability to plug enough gaps to secure the maximum available State Pension.
Pension payments are protected by the triple lock – a commitment by the government to increase the State Pension by whichever is the higher of average earnings, inflation as measured by the Consumer Prices Index, or 2.5%. This principle saw the full State Pension increase from £185.15 to £203.85 a week from April 2023 on the back of sustained double-digit inflation.
How can I check my record?
You can check your State Pension forecast and review your National Insurance record online via Government Gateway or via the Future Pension Centre. This provides a clear indication of whether you have any gaps, allowing you to make an assessment of whether there is a benefit to plugging them.
While younger people might decide they can record enough qualifying years throughout the rest of their working life, those closer to retirement might not be faced with the same opportunity.
What can I do to plug any gaps?
It can be possible to plug gaps for free. Certain circumstances, such as actively looking for work or acting as a carer for a family member, can mean you qualify for National Insurance credits. If they haven’t been applied automatically, you could have a valid claim.
If credits do not apply, the alternative is to voluntarily pay for contributions. This costs £824.20 for one year up until 31 July 2023 and £907.40 thereafter. Each year enhances your State Pension by £275.08 per year, meaning the benefit would only really be felt after three years.
In an extreme example where someone is missing ten years of contributions, the cost to remedy the situation would be just over £8,200. However, over a typical 20-year retirement, having a full entitlement of qualifying years could mean their State Pension would be increased by around £55,000.
It is also possible to use voluntary contributions to ‘top up’ any incomplete years on your record. The cost involved is less than it would be for a full year – potentially as low as £15 – and it results in a full year being added to your record.
Everyone’s eligibility for the full State Pension will depend on their own circumstances, so it’s important to get an accurate, official picture of your particular situation before taking any action regarding voluntary contributions.
It can also be helpful to consider whether any change in your pension might have an impact on your wider wealth planning. Increasing your State Pension, for example, could potentially have ramifications for your tax liability if your combined income breaches certain thresholds.
Equipped with the right information and advice, therefore, you can feel suitably prepared to take whatever action might be needed before it’s too late.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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