National Insurance Contribution Queries

Henry84

Hi folks,
Thoughts of my future pension have been simmering around in the back of my head for the past 18 months or so.

I've been working abroad for the past 7 years. I'm 30 years old, and have very few qualifying years for the UK pension. I've been given the option from the HMRC to boost my qualifying years by paying Voluntary Contributions from the past several years (and also going forth for future years from now onwards) which I believe to be an excellent investment, so long as I don't plan to move back to the UK any time soon. They state that I need 30 years to get the full pension, (this letter is 12 months old, now I believe I need 35 years?), and also believe that pension rules are about to considerably change in 2016 with the new single tier system.

It got me thinking about whether I should pay off my previous qualifying years NOW, or if I should wait to pay until AFTER the April 2016 changes kick-in. Taking into account both scenarios for both the current scheme, and the new single-tier scheme, will it make any difference at all to my final pension amount value (assuming I reach the 35 year mark) if I pay now or after the 2016 reform? Or won't it make a slight bit of difference in the end either way, regardless of if I pay these voluntary NIC's now or after April 2016?

I'm also unsure as how to calculate what my foundation amount will be under both the current scheme, and the new single-tier scheme, taking into account the scenario of paying off my NIC's now. What's the formula used?

I read the handy "single-tier-valuation-contracting-out" PDF on the GOV UK website-

They state -
"When single tier starts we will look at your National Insurance record and work out its value under the single-tier rules. At the same time we will work out what you may have got under the present state pension rules. For both valuations we will make a deduction to take into account any periods when you were contracted out of the additional State Pension. Also the minimum qualifying year requirement will apply. The higher of these two amounts will then become your single-tier foundation amount. You could be in three positions : your foundation amount could be equal to, more than or less than the full single- tier pension."

Couple of follow on questions from this -
-What is the minimum qualifying year requirement?
-What do they mean 'Contracted-out'? Does this mean time spent not paying NIC's?
-And one more question, do you need to have made a minimum of 52 NI contributions to obtain a qualifying year? Or is it lower than this?

Thanks in advance for your answers.

Spidernick

I can't answer all your questions, but can help a bit.

I don't think when you make the contributions will affect the final amount you get, but may be wrong. It wouldn't be significant in all likelihood, even it did.

You will need qualifying 35 years to get the full state pension. A qualifying year isn't 52 weeks, but I'm not sure how many weeks you do need (you can find out how many you have though and I'm sure others will be able to provide a link. There is a minimum number of years you need to get any form of state pension (ten?) and between this and the maximum the pension is prorated.

The full state pension isn't an awful lot, so you should consider whether it is worth paying for extra years. Also the way the pension age keeps going up, you may well be able to get to the 35 years (if not increased further!) in any case should you return to the UK within a reasonable period of time.

If you do make voluntary contributions as you are working you can pay Class 2 rather than Class 3, which are a lot cheaper (£2.75 a week) rather than Class 3's £13.90 a week and Class 2 (which many people think is only for the self-employed - it isn't!) actually gives more benefits than Class 3.

Also think about whether there actually will be a state pension by the time you retire, or if there is whether it will be means tested. Some people worry this might happen.

jamesd

The new minimum qualifying year requirement is to be ten years.

Contracting out is irrelevant to you so just ignore everything you read about it. It refers to opting out of the earnings-related part of the state pensions and keeping only the fixed part that increases based on years paid in instead of income. A person not contracted out receives both parts, a person who was contracted out only gets the extra for the years contracted in but instead they get whatever pension pot their contracted out rebate money from HMRC was paid into. It is no longer possible for individuals to be contracted out and the work case isn't relevant to you. Contracting out does not mean not paying NICs.

You need a minimum paid in amount in a year to make it qualify, rather than a specific number of weeks, though for voluntary purchases it will be expressed in weeks so use them for that.

It will be cheaper to buy extra years now than later. If you do not expect to return to the UK buy all you can now.

Beyond that you have to make a decision. Under flat rate rules all contributions will be worthless once you have earned an entitlement to the flat rate income level. Work 50 years and you get the same as someone who worked 35 years. So you must decide, do you think that you will return to the UK and work to get to 35 years or not? Then buy just the number of years it'll take to get you to 35 by the time you reach state pension age.

However you have another consideration. I think there's a limit on how long you can pay voluntary contributions while abroad. If so my suggestion is that you do get all you can while you can. The money might end up being worthless if you return here and work enough to get to 35 years but you might not do that. It' is a choice for you to make.

ringoroses

As a 56 year old housewife, my national insurance contributions will now fall short of the required 35 years by the 5 years increase.

I was looking at registering as self employed to pay the next 5 years class 2 to make up the deficit, but I have no idea what this involves. Can I just register and pay, or does that trigger a minefield of other paperwork relating to my "business"?

seven-day-weekend

ringoroses wrote: »

As a 56 year old housewife, my national insurance contributions will now fall short of the required 35 years by the 5 years increase.

I was looking at registering as self employed to pay the next 5 years class 2 to make up the deficit, but I have no idea what this involves. Can I just register and pay, or does that trigger a minefield of other paperwork relating to my "business"?

I think you do have to prove you have a legitimate business.

Why not just pay voluntary contributions?

ringoroses

seven-day-weekend wrote: »

I think you do have to prove you have a legitimate business.

Why not just pay voluntary contributions?

I could, but class 2 are much cheaper - £2.75 vs £13.90 wk, plus there seems to be more benefit to paying the class 2 (Spidernick's post 2, above)

jamesd

At 56 with five years to get to 35 years I suggest that you wait until foundation amounts are available if you have ever worked while not being contracted out. It's too likely that you will have enough additional state pension entitlement from SERPS or S2P that may already take you over the flat rate or would cut the number of years needed to below five. Depending on your exact age it also seems likely that you have more than six years to pay the five needed years so have the time available to wait.

A legitimate business includes just about any potentially money-making activity, including occasionally selling things on the net.

However, there is one reason to start paying voluntarily now. The flat rate scheme abolishes the earnings-related part of state pensions so the price difference between class 2 and class 3 NI may also vanish. So you might want to speculate and buy class 2 now while the costs is cheaper.

ringoroses

jamesd wrote: »

It's too likely that you will have enough additional state pension entitlement from SERPS or S2P that may already take you over the flat rate or would cut the number of years needed to below five. .

Thanks.
I have no SERPS or S2P, most of my national insurance contributions being home responsibility credits, the rest of my working life local government, so I do have some LGP to come, but not a huge amount, hence my interest in maximising the basic pension at the lowest cost. I am currently looking at putting the annual non earner £2880 contribution into a private pension too to get the tax boost. I started a thread about that a few weeks ago.

Looks like I could sell a few things on, say, eBay and register as self employed. I hand knit, crochet etc, so I may even actually be able to make a couple of sales! Every pension pound's a prisoner!

jamesd

With no SERPS or S2P then it looks fine to use class 2 now. That means that your new rules calculation will be higher than your old rules calculation and since you don't have 35 years yet you'll still gain for the extra time before the new rule comes in.

JB9302

Jamesd,
I am retired and reach state pension age in Jan 17 , recent statement shows £113.10 + £3.50 GRB (42 yrs NI).
Was paying Class 2 contributions between 2002-9 till I retired , previous yrs worked from 67-2001 and contracted out for quite a few yrs .
Any benefit in paying any more contributions from now till Jan 17 that may increase the basic state pension ?

Thanks

jamesd

JB9302 you will reach state pension age before the flat rate state pension comes in so you won't be affected by those changes that will affect ringoroses. Your statement shows that you will get the £113.10 which is the current full basic state pension for 30 years so you cannot gain from paying class 2 contributions.

There are two things that you, as a person reaching state pension age under current rules, can do:

1. Not claim it. Deferring will cause it to increase by 1% a week, 10.4% a year. It's one of the best deals going provided you're in reasonably normal good health. If so I suggest 1-3 years for a man or 2-5 for a woman as very likely to make you better off before you die. Deferring increases all parts of the pension, not just the basic state pension part.

2. There has been announced a scheme that will allow people to pay lump sums to buy up to £25 a week of state pension in a year or so. This looks like a less good deal than deferring so I suggest giving priority to deferring. This scheme is as usual less good value for men than women because it doesn't take into account their different typical life expectancies. It can still be a good deal, but not as good as deferring, for those who anticipate a longer than usual life or want income "insurance" in case they do.

Because you will reach state pension age before the flat rate comes in you should ignore all the discussion of how those who contracted out are winners under that system.