Buying Extra Years When Already Paying Income Tax on NHS Pension

MikeyPGT

As a 62 year old who was lucky enough to be able to draw down an NHS pension at 55, I have been living mostly on my private pension for the past 7 years.  I have recently checked on my NI contributions and - as expected - I have some gaps (although not the full 7 years as I have done some part-time work which attracted NI.  As I am unlikely to take on any work that will take me over the NI threashold in the next 4 years, should I look at buying back some of the missing years of contributions even though all of my state pension will be subject to basic rate tax?  My gut is telling me no, but any thoughts from others much appreciated.

molerat

A full NI year will cost you around £800 and will give you £5.29 per week, £275 per year, in pension.  That means that after 20% tax it takes 3.6 years to recover the outlay not taking into account the inflationary uplifts in the pension received.  If you bought an annuity with that £800 you could expect an after tax return of around £25 per year taking 32 years to recover the outlay.  Now do the math as they say across the pond, usually referred to as a no brainer decision around here

Just be aware that pre 2016 years are unlikely to increase your pension amount.

If you want to post up your forecast details someone will talk you through it.

Current amount at April 2022

Pre 2016 years held

Post 2016 years held

COPE amount

Gap years and price to purchase

Be aware that the cost to purchase the majority of those gaps will increase by at least 10.1% from April.

Silvertabby

I bought the 4 years I needed to take me up to the full new state pension.

Like you, all of my State pension is subject to tax, recovered by adjusting the tax code applied to my RAF pension.

Despite that, I will get my investment back in less than 4 years, so still well worth doing.

MikeyPGT

Thanks Molerat


This is what the Pensions Calculator is telling me ...

• 43 years of full contributions
• 5 years to contribute before 5 April 2027
• 3 years when you did not contribute enough

Estimate based on your National Insurance record up to 5 April 2022

£158.68 a week

Forecast if you contribute until 5 April 2027

£185.13 a week

Pre 2016 years held - 1976 - 77 to 2015 - 2016 all full years 

Post 2016 years held - 2017 - 2018 to 2019 - 2020 full years 

Gap years and price to purchase - 2016 - 2017, 2020 - 2021, 2021 - 2022 no contributions - purchase price 2016 - 2017 (£586.45) 2020 - 2021 (£795.60) 2021 - 2022 (£800.80)

I can afford to buy the 2016 - 2017 year before April 2023 by using my study grant that was going towards a £2k credit card debt at 23.292% - any more would have to by borrowing or deferring debt.

Suggestions much appreciated!

MikeyPGT

Just found my COPE estimate - £57.71 a week

af1963

Probably not worthwhile doing if you need to borrow at 23% to pay for it. ( Or pay off less 23% debt, which amounts to the same thing.)  I did some rough figures assuming that you borrow £586 until the extra income stream starts with your state pension, and then use the extra £5.29pw to pay the debt.  At 23%, by the time the income starts to come in, the debt has grown to £1400 and annual interest has grown to more than £300, so the extra pension doesn't cover the interest.

af1963

If you had cash available or could borrow at 0%, you'd pay off the capital in under 3 years and be better off from then on.  If you could borrow at 10%, you'd break even after about 5 years of pension payments. At 15%, it takes about 9 years, and anything over about 20% would never break even.

molerat

So you need 6 years to reach the full £185.15 but the 6th will only get you 2p so only 5 are viable.  You have 4 going forward, 23-24 to 26-27, so can reach £179.84 leaving one from the gaps up to and including 2022-23.  2016-17 is part paid so is the obvious target at 28% off full price but must be purchased by 5 April this year or it ceases to be available.  It seems the problem you have is actually affording it.  As for working you do not need to actually pay NI as earning in excess of £123 per week you get credited with class 1 NI.

MikeyPGT

Thanks Af1963 and Molerat - just a thought - does my NHS pension count as earnings?  If so then I think I should have been creditted with the last 2 years ...

molerat

MikeyPGT said:

Thanks Af1963 and Molerat - just a thought - does my NHS pension count as earnings?  If so then I think I should have been creditted with the last 2 years ...

Not for that purpose.

MikeyPGT

Think I'll just stick to Plan A of aiming to have paid off all my credit card debt by July 2025 and wallow in the knowledge that I'll have an extra £160 or so a week on top of reduced outgoings!