NI Contributions & early retirement

malcolmfowler

My wife left her teaching job last year aged 58 and started drawing a small pension. She has 38 years NI contributions.

I recently ran a Old Age Pension calculation on the Governments web site and the results suggested that she should carry on paying NI to achieve a full state pension.

Can anyone tell me what the rules are arond this. I though that 35 years NI contributions were enough for a full pension.

I'm thinking of retiring now, 59 years old and 40 years NI contributions. Will I lose out on my state pension if I stop paying NI?

Thanks

TELLIT01

The issue is around being 'contracted out' at any time in the period of NI contribution. From my understanding, 35 years of full level contribution is required for a full state pension. If any of your employers have 'contracted out' it will affect the pension. This is where all the confusion has come about. The original government statement was that anybody with 35 years NI contribution would get the full pension. It was only when people started using the calculator that the reality came to light.

Undervalued

It depends on how many years contributions you have got and whether you were contracted out for some or all of those years.

A state pension forecast should tell you this fairly clearly and what pension you would get (in today's money). What it can't of course allow for is any further changes in the rules before you get you state pension (presumably at age 66)?

You can "buy back" contracted out years. Whether that is worthwhile would depend on how else you might invest the money and of course on how long you live!

p00hsticks

There have been a number of threads on this topic over on the Pensions board.

Whilst it is true that, going forward, under the new State Pension rules introduced in April 2016, anyone starting their working life now will just need 35 years NI to get the full state pension (currently £155.65 a week), for those who have already accumulated years under the old rules things are more complicated and there are transitional rules in place.

You wife is potentially one of the winners under these rules. She has in the past been 'contracted out' and thus paying a lower percentage rate of NI than those 'contracted in'.

You say you have obtained her 'starting amount' pension forecast as at April 2016 ? https://www.gov.uk/check-state-pension

Chances are this will be little more than the basic amount that she would have received under the old rules (£119.35). However, she now has the option of increasing that amount by £4.45 a week for each additional NI year she obtains post April 2016, up to the maximum of £155.65 or until she reaches SPA. She can do this either by working, getting NI credits (if on certain benefits or possibly providing childcare for grandchildren) or by paying voluntary Class 3 contributions of around £730 a year.

This guide here explains more
https://www.royallondon.com/Global/documents/GoodWithYourMoney/TOPPING-UP-YOUR-STATE-PENSION-GUIDE.pdf

malcolmfowler

Thanks for the feedback,

She worked for Surrey County Council for most of her years, part time hence the low final pension. I can't think that a CC would have been able to contract out.

This is from the calculator today...

You need to continue to contribute National Insurance to reach your forecast
Estimate based on your National Insurance record up to 5 April 2016
£128.84 a week
Forecast if you contribute until 5 April 2022
£155.52 a week
£155.52 is the most you can get

Is it an option to 'sign on' and look for a job and have her NI paid that way? Or shouldl we try and calculate the value of paying NI for another 6 years to get the additional state pension?

Thanks

agrinnall

malcolmfowler wrote: »

She worked for Surrey County Council for most of her years, part time hence the low final pension. I can't think that a CC would have been able to contract out.

It seems you would be wrong to think that.

http://www.surreypensionfund.org/paying-in/contracting-out.aspx

malcolmfowler

Thanks p00hsticks, your answer came in whilst I was typing my reply.

All makes sense now.

On a quick calculation paying in the extra NI over the next 6 years does give quite a good return versus todays annuity rates. i.e. increasing het pension by £26 per week or £1,300 per year on a £4830 contribution.

Could we wait until she is 66 and then pay 6 years back contributions? At least we know we had made it to SPA!

malcolmfowler

Hi agrinnall,

She was/is in Teachers Pension Fund. I need to check that out

molerat

Undervalued wrote: »

You can "buy back" contracted out years. Whether that is worthwhile would depend on how else you might invest the money and of course on how long you live!

Please tell us how you buy back contracted out years ?

molerat

malcolmfowler wrote: »

Thanks for the feedback,

She worked for Surrey County Council for most of her years, part time hence the low final pension. I can't think that a CC would have been able to contract out.

This is from the calculator today...

You need to continue to contribute National Insurance to reach your forecast
Estimate based on your National Insurance record up to 5 April 2016
£128.84 a week
Forecast if you contribute until 5 April 2022
£155.52 a week
£155.52 is the most you can get

Is it an option to 'sign on' and look for a job and have her NI paid that way? Or shouldl we try and calculate the value of paying NI for another 6 years to get the additional state pension?

Thanks

Signing on is one way of gaining credits. Looking after grandchildren is another. Class 3 voluntary contributions are excellent value with a payback of 3 - 4 years depending on tax, way better than anything an IFA will sell you.

Most defined benefit pension schemes were contracted out. The good thing is that those reduced NI contributions will have made much more in the contracted out pension than they would have in the State Pension.

Undervalued

molerat wrote: »

Please tell us how you buy back contracted out years ?

If you will receive less that the full state pension, you can buy extra up to the maximum, which is more or less the same thing.

I am a similar age to the OP and was quoted a one off payment of roughly £730 now to buy an extra £4.45 per week for life.

So you need to look at what return you would be losing on the £730 before you start getting the a taxable £231 per year back from age 66 onwards.