The State Retirement Pension and extra NICs

kidmugsy

Are you considering making extra National Insurance Contributions to increase your eventual State Retirement Pension? Perhaps you should read this.

https://youngfiguy.com/the-state-pension-ni-fiasco

By golly, it's complicated.

drumtochty

Good find kidmugsy

molerat

I was lucky as I had been getting annual forecasts for myself and MrsM since early retirement in 2009. The early ones split down to basic, S2P and grad so moving to 2016 was easy as I had all the figures to work on and knew exactly which additional years would make a difference. A simple "This forecast is based on the old / new calculation starting amount" or something similar would save a lot of heart/brainache.

SnowMan

The payment of class 3 voluntary contributions for missing pre April 2016 tax years is likely to become a bit of an issue, as the deadline for paying these at the in year rate is 5th April 2019, less than a year away.

One of the difficulties for individuals is that they don't know whether their starting amount of state pension at April 2016 has been based on the old or new rules. And without knowing this in many cases it is impossible to know whether paying class 3 contributions for missing pre April 2016 years is a good idea.

The other difficulty is that the future is unknown, so individuals who could get up to the full new state pension, if every future year is a qualifying year, might not in reality get to the full amount if they give up work before State Pension Age and don't get credits subsequently. So you need to know the cut off number of future years above which buying viable missing pre April 2016 years is wasted money.

If anyone is thinking of paying class 3 contributions, then now is probably the time to contact the DWP (Pensions Service) and ask them how your starting amount was calculated.

You need to know the calculation at 6th April 2016 on the old rules and the calculation at April 2016 on the new rules. It is not always enough just to know your starting amount and whether it was calculated on the old or new rules basis*. This info and the info on the online system should then be enough to do the sums.

I did have a spreadsheet that worked all the scenarios, but I gave up with making this available as it required individuals to find out their starting amount on the old and new rules at April 2016, and so requires information that isn't readily available without asking the DWP.

In some cases where the starting amount calculation is on the old rules, you can work out the lower new rules figure from the COPE amount on the online system if it is showing, but it's best to ask the DWP for the old and new rules as it is easy to make a wrong assumption/calculation. Of course in some cases you only need to know the starting amount. For example if the starting amount was £180pw, (i.e higher than the headline full new state pension), based on 30 Qualifying Years, that's all the info you need to know that buying missing pre April 2016 years is wasted money.

I would be interested to know what response anyone has from the DWP if asking for their starting amount on the old and new basis. I actually got my figures on the old/new basis by phone in 2016 when I contacted them to say I needed both. They went through both calculations with me after I insisted I needed to know.


*Consider someone with a starting amount £120pw on the old basis, £119pw on the new basis with 30 qualifying years up to April 2016, so £120pw on the old basis applies. Assume that person has only 5 potential post April 2016 qualifying years (e.g. reach SPA in May 2021) so they can't reach the full new state pension. The payment of a class 3 contribution for a missing in time pre April 2016 year will increase their state pension because the new rules calculation overtakes the old calculation. However it would be easy to think 'my calculation is on the old rules, it is based on 30 years which is the maximum for the old rules, so I won't consider paying class 3 for pre April 2016 years'

YoungFIGuy

Thank you for posting the link kidmugsy.

As ever Snowman is spot on. And I'd endorse his recommendation: if you aren't sure how your starting amount is calculated then speak to DWP. I'd add, if you are 'sure' double check your calculations!

In terms of contacting the DWP, a relative of mine has done this. And it sounds like a similar experience to you Snowman. They explained how the starting amount was calculated and how many NIC years they had (in 2016).

Snowman also raises a point that I didn't really cover in the post (although I talk about it in the comments): NIC rates for pre-April 2016 years are fixed up to April 2019. From the next tax year, the rates will increase (and will likely continue to do so over time, more recent contribution years tend to be more expensive to 'buy'). Another point I only briefly touched on is that Class 2 for self-employed may be abolished very soon. The Government certainly has it in its sights and only a backbench revolt saved it last year. If part of your plan is to built entitlement using, the quite favourable, voluntary Class 2 contributions, I'd consider having a back-up plan in case things change.

A final aside, about a year ago the Work and Pensions Committee suggested a vastly improved Pension Statement which would set out in clear English what your starting amount is, the calculation, a comparison between the Old and New pension and your NIC years. Unfortunately, I've heard nothing about this since. It seems that, like lots of pensions related things, it has been kicked into the long grass.

greenglide

A final aside, about a year ago the Work and Pensions Committee suggested a vastly improved Pension Statement which would set out in clear English what your starting amount is, the calculation, a comparison between the Old and New pension and your NIC years.

What would always have been useful is a annual "statement" of people's NI account so they would have known what each year should have bought them and definite confirmation that employers had actually had actually handed over the money.

Of course their of multiple reasons for the government not to want to do this, ranging from cost and complexity to the government not wanting people have much some of the changes had actually cost them.

YoungFIGuy

greenglide wrote: »

What would always have been useful is a annual "statement" of people's NI account so they would have known what each year should have bought them and definite confirmation that employers had actually had actually handed over the money.

Of course their of multiple reasons for the government not to want to do this, ranging from cost and complexity to the government not wanting people have much some of the changes had actually cost them.

Agreed. One of the conclusions from my post is that the Government should shoulder a big portion of blame because they have communicated these changes very poorly. But, to be honest, that's not a surprise. I don't think DWP and HMRC are particularly good at communicating (period).

zolablue25

Can I just ask what, I think, is a related question?

If your full amount is the new SP amount (£163-ish) and your online statement says you are short, say, 4 years after a COPE calculation, and you have another 10-15 years before reaching State retirement age - do you need to look into it any further or can you assume that you will make up any shortfall in requirement over the remainder of your working life (assuming you stay employed of course)?

drumtochty

Correct Zoloblue25

drumtochty

Guys in approx April 2016 to the summer of 2016 you were given both the amount of the old and the new system pension on your pension statement and then advised you would get what was the higher of the two amounts.

Then later in the summer 2016 the pensions minister advised he had got complaints that advising two different values then advising that the higher of the two values would be awarded to the person was considered far to complicated. They then advised the DWP to simplify the statement by only showing the value the person would get.

Simple_Soul

SnowMan wrote: »

*Consider someone with a starting amount £120pw on the old basis, £119pw on the new basis with 30 qualifying years up to April 2016, so £120pw on the old basis applies. Assume that person has only 5 potential post April 2016 qualifying years (e.g. reach SPA in May 2021) so they can't reach the full new state pension. The payment of a class 3 contribution for a missing in time pre April 2016 year will increase their state pension because the new rules calculation overtakes the old calculation. However it would be easy to think 'my calculation is on the old rules, it is based on 30 years which is the maximum for the old rules, so I won't consider paying class 3 for pre April 2016 years'

I did not know this. Are you sure it is correct?

Are you saying that, if someone did not have enough years left before reaching SP age to make sufficient NI contributions to get the full nSP, they can pay pre-2016/17 years as voluntary NICs, even though they already have 30 qualifying years and their starting amount was based on the old SP?