Buying additional years

dreamon100

Hi, we got a pension statement for my wife, she has 23years of NI contributions in total on it and won't reach retirement age for another 8 years.
My question: is it worth buying another 6 years (all you can go back) and then potentially keep buying until she gets to 35years.

I estimate that it will cost £4368 to buy the 6 years, then approx £800 per year, but would the pension increase be worth it?
I realise it depends a lot on lifespan, but am looking on the bright side!!

thanks in advance.

jamesd

The cheapest option for her is to use self-employed contributions for the next eight years to get her to 31 years, if required. But it might not be needed, she might already get the maximum possible amount.

If she was ever contracted out say so, she might benefit from more. That contracting out may have been by her or she might have been in a contracted out work scheme. Final salary and similar work schemes were usually contracted out.

The major catch in knowing how many years to buy is that she will retire after the flat rate system comes in. That has a cap that is expected to be around £155 in today's money. So before knowing that it is worth buying more years, she first needs to know what her foundation amount is. That will be the higher of her current entitlements under the old or new rules.

Once she knows her foundation amount it'll be possible to know what to do. If it's above the flat rate there is nothing to gain by adding more years. If it is below then knowing both the old and new rule calculations is needed to work out whether more old years are best or waiting until the flat rate comes in and getting more new rate years. If old rules is higher than new but below flat rate, buying old years would be a good deal - but maybe still not as good as future self-employed contributions.

The increase is easily worth it. 1/35th of the flat rate per year if she gets more under flat rate rules. With that expected to be around £155 a week the gain is around £230 a year for life for each year acquired. Different gain under the old rules, 1/30th of the basic rate today.

She can ask for her old and new rules calculations and foundation amount to help with this decision.

If you think this is complicated, you'd be right.

dreamon100

Hi, sorry for the delay, by my rough calculations it will only take approx 4.5 years to regain the £4368, so hopefully she'll last longer than that!!!

I knew it would a 'piece of string' question but to me the logic has be it's worth fronting the money up while we've got it, to get a benefit later on.

jamesd

Do you know that the self-employed NI contributions cost just £2.75 a week, £143 a year? She can get six years of that for just £858. With 8 years to go at self-employed rates she still would need to buy four years to get to 35 total years.

The flat rate cap isn't 35 years, it's whenever you get to the flat rate income level. Additional state pension means that many people retiring after the flat rate comes in will get there with fewer than 35 years needed.

So she may not need 35 total years. She was working so she'll have some additional state pension entitlement, the earnings-related part of the state pension. What are the additional state pension and graduated retirement benefit parts of the state pension statement she has? How about the basic state pension?

For buying years with dates before the flat rate comes in she'll get 1/30th of the basic state pension added, 3.77 a week. For years with dates after, 1/35th of the flat rate, about £4.42 assuming it's 155. The later years deliver more pension for the money than the earlier ones and eight years of post flat rate will gain her perhaps 35.36. If her current combined state pension is more than 119.64 those 8 future years would be all she needs. If it's anywhere close to that she can wait for her foundation amount then do an exact calculation.

I'm worried that almost all of the 4368 may be wasted money, getting her nothing beyond what eight years of self-employed contributions would get her.

goodValue

From #2

Once she knows her foundation amount it'll be possible to know what to do. If it's above the flat rate there is nothing to gain by adding more years. If it is below then knowing both the old and new rule calculations is needed to work out whether more old years are best or waiting until the flat rate comes in and getting more new rate years. If old rules is higher than new but below flat rate, buying old years would be a good deal - but maybe still not as good as future self-employed contributions.

jamesd
Could you please explain more about these old and new years? (I assume old year means one before April 2016).
I would have thought that the factor determining the pension value would be the total number of qualifying years.
So can you please give details if buying additional years can be more beneficial if you buy them at a particular time?

greenglide

The problems arise because someone who has been in contracted employment can be in a position whereby his "old rules" amount give more than his "new rules" amount but is less than the nSP maximum. If he already has 35 years contributions he cannot buy any extra years and they would be pointless anyway. However after April 2006 he can buy extra years to attempt to get up to the nSP maximum.

It can work the other way as well ....

zygurat789

jamesd wrote: »

Do you know that the self-employed NI contributions cost just £2.75 a week, £143 a year? She can get six years of that for just £858. With 8 years to go at self-employed rates she still would need to buy four years to get to 35 total years.

The Class 2 stamp may be nice and cheap but the method of paying for it is changing and it will be done through the self employed section of the tax return from April 2016. This means that people who pay Class two could have to complete a tax return saying that they have self employed income.
Not something many people will want to do I would have thought.

goodValue

Thanks for the prompt reply Greenglide.
So, after April 2016, you can buy qualifying years to replace years while you were contracted out, and this will reduce your Contracted out Deduction?

molerat

goodValue wrote: »

Thanks for the prompt reply Greenglide.
So, after April 2016, you can buy qualifying years to replace years while you were contracted out, and this will reduce your Contracted out Deduction?

Not as such. In April 16 you will be given a starting figure and how it was worked out will become irrelevant as if it is below the new maximum figure it can be added to.

goodValue

So, for someone in dreamon100's situation, would it be best to buy old years to get as near as possible to the maximum amount? And after April 2016 buying new years would further increase their pension.

molerat

If no further contrbutions through employment are going to be made and there some gaps since 2006 then those years can be bought at lower rates than current prices. If not contracted out then they make good value as they will be recovered in around 3 years. Those rates are available until 2019 so no urgency. I expect that prices will increase post 2016. We are looking at buying 8 years for MrsM for around £5.5K which will be repaid at around £35 per week tax free so an absolute bargain as long as she doesn't fall under a bus.