Should I pay upwards of £4K to top up my Old Age Pension [OAP] ?

Phil27356

I am almost 63 and retired from Armed Forces  and subsequently HMG in 2016.  I am currently in receipt of pensions from both.  I realise that I shall receive a reduced OAP at the age of 66 anyway due to being 'Contracted Out' by my works' pension schemes. However, I have also got 5 absent years of NI contributions to date and up to OAP age.
I realise that there is no guarantee that I will even get to Pension age but:  Given the initial cost of plugging these gaps, of between  £700 and £800 per year, plus the loss of, albeit, paltry interest on my capital;  would it be more beneficial overall for me to pay these costs to increase my weekly OAP by about £4.40 (before tax at basic rate) per year paid and also have these weeks index linked along with the rest of my earned pension?
Are there other circumstances such as inflation/CPI/tax etc. that would make it more advisable, or less, to plug the gaps or not.
[Apologies if that is a bit rambly]
Many thanks 

Silvertabby

I'm in a very similar situation to you ( RAF, Local Government, retired at 60) and needed 4 years of Voluntary Class 3 NI contributions.  Is it worth it? Absolutely!

In round figures, I paid £3K for an additional £20 per week State pension.  That's an extra £1K per year of fully index linked pension for the rest of my life.

Even after paying 20% tax, I get my investment back after less than 4 years - after that it's all profit.

Yes, not such a good return if I fall under a number 13 bus a year after SPA, but such is the case with all pension savings.

Note:  Regardless of any other cheaper gaps in your NI records, only paying for 2016/17 onwards will add to your State pension.  You could also do as I did and wait until you are in your last year before retirement before making payment, thus minimising your chances of meeting the aforementioned number 13 bus before accruing the benefits!

Also note that you may not need to pay the full 5 'missing' years in order to reach the full single tier pension - it depends on your actual forecast.  In my case, I had 6 years of 'missing' NI but only needed to pay for 4 years to reach the maximum State pension. That was actually 3 years at the full rate, and the 4th year at £4.80 - so still worth doing.

tacpot12

I don't think it is is worth it for you. £4.40 per week is only £228 a year (before tax), and you will pay 20% tax on this amount (assuming you are already recieving at least £3000 from your occupational pensions). So the £228 year becomes £182. Even if you live for 20 years, you will have not have broken even - I have assumed that you would draw down on the £4000 or so that making up the missing years will cost you, and that the investment growth on the this retained capital will allow to increase your drawdown amount in line with inflation.

greatkingrat

If you are only £4.40 short of the maximum pension, then you won't need to pay all of the missing years - one year should be enough. If you post the exact figures from your state pension forecast on here someone will be able to confirm how many years you need to pay.

Silvertabby

tacpot12 said:

I don't think it is is worth it for you. £4.40 per week is only £228 a year (before tax), and you will pay 20% tax on this amount (assuming you are already recieving at least £3000 from your occupational pensions). So the £228 year becomes £182. Even if you live for 20 years, you will have not have broken even - I have assumed that you would draw down on the £4000 or so that making up the missing years will cost you, and that the investment growth on the this retained capital will allow to increase your drawdown amount in line with inflation.

In round figures, the £4K that OP mentioned would be to buy 5 years of NI.  At £5 per week, that's £1,300 per year of additional index linked State pension.

Even after 20% tax, that would give OP  a smidge over £1K per year in return for his one off payment of £4K, a break even period of just 4 years.

Silvertabby

greatkingrat said:

If you are only £4.40 short of the maximum pension, then you won't need to pay all of the missing years - one year should be enough. If you post the exact figures from your state pension forecast on here someone will be able to confirm how many years you need to pay.

My reading of OP's post is that he is short by 5 x £4.40.

molerat

I read it as multiple years required too.

OP, please post up exactly what your forecast states.  Each post 2016 year will add £5,29 to your forecast so 5 years at £4K will give you £1375 per year pension.  You could always buy an annuity with £4K which would give you somewhere in the region of £160 per year pension.  How do those numbers look now ?  I would honestly consider paying for a year if it gives anything over around £2,50 pension - still way better than anything else out there.

xylophone

I am currently in receipt of pensions from both.  I realise that I shall receive a reduced OAP at the age of 66 anyway due to being 'Contracted Out' by my works' pension schemes. However, I have also got 5 absent years of NI contributions to date and up to OAP age.

Does the OP mean that having left employment in 2016, he has no contributions for 17/18, 18/19/, 19/20, 20/21  and 21/22?

xylophone

OP, please post up exactly what your forecast states. 

Yes, indeed.

wjr4

Silvertabby said:

Yes, not such a good return if I fall under a number 13 bus a year after SPA, but such is the case with all pension savings.

Side note: it isn’t the same as defined contribution pensions. So not ‘all’ pensions. 

p00hsticks

xylophone said:

OP, please post up exactly what your forecast states. 

Yes, indeed.

And is case the OP isn't aware that they can get a personalised forecast, here's the link

https://www.gov.uk/check-state-pension

Or, if you don't have a Government Gateway Id and can't prove your identity to the level required to get a Government Gateway ID you can contact the Future Pension Centre

https://www.gov.uk/future-pension-centre