Voluntary contributions - yay or nay?

mattdrummer

Hello,

I'm trying to decide whether to top up my NI shortfalls and would appreciate any advice.

I'm 37, I have 9 years of full contributions and 12 incomplete. My state pension age is 68.

There are 6 years that I could choose to top up to full years via voluntary contributions. One of those stands out - 08/09 - as the amount to top up is lower, at £490 (I'd already made a small contribution that year). The other five, the five years from 12/13 to 16/17, range from £689 to £733 to top up.

For years prior to 08/09 it says it's too late to top up and 'you can usually only pay for the last six years', but for all the years I have available to top up it says I have until Apr 2023 to do so (so that's clearly not a hard and fast rule). It also says the amounts I quoted above may go up on Apr 24 this year.

In terms of whether to top up or not, I note Martin's table here saying that 'as a rule of thumb' buying an additional year gets you another £230 annually on your pension. I'm curious what makes that a 'rule of thumb' though.

It seems like it applies quite literally. £230/year extra per year's contribution is roughly £4.42/week. And if the maximum amount of £164.35/week takes 35 years' contributions, that equates to £4.70/week per year of contribution. The difference between £4.42 and £4.70 is not material to my choices, so if it's that straightforward then I can just make an assessment on that basis.

It seems obvious that if I'm likely to end up below 35 years of contributions then topping up these years makes sense - as the breakeven point on the investment is between 2ish and 3ish years of life post-retirement.

As I understand it then, the more important question I need to answer is how likely I am to get to 35 years of contributions, as if I get there anyway these topups are 'wasted' (i.e. I pay more, but don't get more in return).

So I have 31 years to go til my state pension age and I have 26 years' worth of contributions to make up. If I think I'm going to work 26 years between now and then then there's no need to top up. At the moment I have 5 years of wriggle room, or years I could not work. Buying an extra year now 'cheaply', just gives me another year of wriggle room. So say I wanted to retire at 60, it might be wise to buy those years now.

Am I thinking about this the right way? :think:

My gut tells me that the difference between the £490 and the 'normal' price of making up a year makes it worth going for now (that £250ish difference is sufficient to outweigh the risk of 'losing' the £490 if I end up contributing more than 35 years), but for the other years it's probably not worth it.

Thinking about it, if I can top up years up to six years after the fact, then surely I can just do a mad top-up rush when I hit my mid 60s if I need to, and the cost of doing that will likely be comparable to the cost of doing it now (taking into account inflation, etc.)? In fact, I think I'm talking myself out of topping up at all... if I can get a significantly inflation-beating return on that £490 between now and then, over the course of 30 years surely that outweighs the potential benefits of giving it to the govt now rather than an inflated version of £750ish in 30 years?

:wall:

Anyway, that's my thought process. It's starting to feel like not that important a decision, but would love to know if I'm missing something important.

Many thanks!

mattdrummer

Oh, and just to add I paid social security in the US between 2012 and 2017, and have started too look into whether there's some kind of reciprocity arrangement. I didn't add that into the main post so as not to complicate things, and I think based on what I'm learning it's probably not going to be hugely valuable either way, but again I may well be missing something! If someone happens to know something about that I'm all ears but planning to make the decision for this year based just on UK considerations.

drumtochty

Please advise the monetary value of your state pension to date. Have you a state pension forecasts, if not, get one.



You need 35 full years and you have 9 full years. Therefore and we need to know that monetary value to date. In simple terms you can get the remaing 26 years by arround the age of 63.



Therefore pension forecast first before taking any actions.