Voluntary NI Contributions - Is it worth it?

Angus78

Hi
Am just wondering if voluntary payments are worth it. What do you actually get for doing it? Can the same money be invested elsewhere for better value?
Thanks
EmmaB

CIS

each weeks contribution of class3 voluntary NI secures one week towards your state pension. But, if you are relying totally on class 3 NI you will need to pay 52 contributions for it to count for a tax year.

Class 3 does not accrue any state second pension.

Can I ask why you want to pay class 3 NI ?.

If you are out of work becasue you are raising children your record will be covered for you by Home Responsibilities Protection (HRP) until the child is 16, if you receive the child benefit in your name.

To find out if it is worth paying class 3 NI (they only count for State Pension/Bereavment benefit), contact State Pension Forecasting on 0845 3000168, or online at https://www.thepensionservice.gov.uk

class 3 leaflet here: http://www.hmrc.gov.uk/leaflets/ca08.pdf

Milarky

Can the same money be invested elsewhere for better value?
Thanks

The quick answer is "probably not". The value of a voluntary contribution is about £1 a day - £7 a week - I believe. That 'buys' you a proportion of annual pension. What proportion? You need 44 years to get a full pension if you are a man [or a woman born later than 1955] so you'd need to pay 52 weeks x 44 years to create an entitlement of about £82 pw - £4264 pa.

That's about £16,060 for a return of £4264 - 26 percent. Not that your pension will still be £82pw years in the future - or that the weekly voluntary contributions won't increase. But since both figures - what you pay and what you get - go up in line with prices annually, the comparison between what you pay in and what you then draw is a meaningful one.

A pension - including the state pension - is a form of insurance of course. This means that you aren't 'guaranteed' to get back what you paid unless you live long enough. On the above figures it looks as though you'd be 'better off' as long as you lived five years beyond state retirement age - four years to get an equal sum repaid, and a further year to cover the interest.

Also bear in mind that with voluntary contributions you may have options - as CIS pointed out. The voluntary contributions are therefore the 'dearest' option available when in many cases the same rights can be built at a no cost or very little cost

HRP: No cost [saving £7 pw]

Unemployed/signing on for credits: No cost

Employed paying 'Class 1': No cost, provided you work more than 46 weeks a year. If you work fewer weeks there is an average cost eg 39 weeks: £1.27, 30 weeks: £3.05, 26 weeks £3.85, 20 weeks £5.04, 13 weeks £6.43

Self employed paying 'Class 2': a weekly flat rate over just over £2. This actually looks 'cheaper' than PAYE in some cases [above] since a self employed person can 'employ' themselves 52 weeks a year. Employees cannot always chose to be employed.

But although every other option is undoubtly 'better value' than paying voluntary contributions, the basic 'what you pay for what you get' calculation shows that it almost always worth paying them if you don't have those other options available to you.