Ex Military Opted Out

IanBerry

I joined the Army in 1971 and served 24 years. During my service, the Public Services 'Opted Out' of NI payments (Reduced donation to allow for more salary is how it was sold to us). I finished my service in 1995 and went into a further 21 years of engineering employment where full contributions were paid, and from which I receive a pension. Due to health issues I took early retirement from full time employment in 2016 aged 61 and did some part time work. I currently receive £184 per week State Pension. My record of NI contributions shows 47 years of Full Contributions and 3 years where insufficient payments have been made which I can top up for a cost of £1577 to get the full £203 per week. So 1577/19 = 83 weeks to break even at today's pension rates. However, whilst State Pension is not taxed, it does class as income and subsequently additional tax is removed from any other earnings including pensions. So even if I did decide to make the voluntary contributions to get the additional £19 per week, I would be penalised by having to pay more tax on my military pension so they get you both ways.

molerat

Not sure how you are going to get £19 from 3 years ? 3 years will produce £17.46 max.  Your sums don't add up.  What is your exact pension amount and which years are showing as not full and cost each ?

squirrelpie

"Reduced donation to allow for more salary is how it was sold to us" - it didn't buy you more salary; it bought you more military pension.

"I would be penalised by having to pay more tax on my military pension so they get you both ways." - You're not being penalised, you're simply paying the tax that's due on your income, the same as everybody else.

Marcon

IanBerry said:

I joined the Army in 1971 and served 24 years. During my service, the Public Services 'Opted Out' of NI payments (Reduced donation to allow for more salary is how it was sold to us). 

You paid lower NI, which increased your take home pay. As a scheme member, you were not just getting the benefit of lower NI, but also building up an excellent scheme pension.

IanBerry said:

However, whilst State Pension is not taxed, it does class as income and subsequently additional tax is removed from any other earnings including pensions. So even if I did decide to make the voluntary contributions to get the additional £19 per week, I would be penalised by having to pay more tax on my military pension so they get you both ways.

It's a common misconception that state pension isn't taxed. It is paid gross, but is still part of your income, so potentially taxable if your overall income exceeds the personal allowance. If you increase your state pension by making voluntary contributions, the extra tax you pay (and you sound like a basic rate taxpayer?) is currently at 20%, so you're still getting 80% of the 'extra' state pension.

pinnks

It never ceases to amaze me how so many people whing on about tax and give the impression they think they would be better off with £0 than 80% of whatever the amount would otherwise be.  Really strange mentality...

IanBerry

molerat said:

Not sure how you are going to get £19 from 3 years ? 3 years will produce £17.46 max.  Your sums don't add up.  What is your exact pension amount and which years are showing as not full and cost each ?

OK to be exact as you have requested it: I currently receive £184.4 per week. The max state pension is £203.85 a difference of £19.45. So the voluntary contribution total cost over the 3 years where shortfall occurs of £1578 when divided by the potential increase of 19.45 equates to 81 weeks. The years where the shortfall occurs are 2018-19 (£21.89), 2019-20 (£760.8) 2020-21 (£795.6) where I had no earned income other than my military pension and my pension from my post service employment. So in terms of achievable increase taking the tax paid on other income into consideration I would receive an additional £15.56 per week at a cost of £1578 means in actual fact it would take 101 weeks to break even. 

BikingBud

pinnks said:

It never ceases to amaze me how so many people whing on about tax and give the impression they think they would be better off with £0 than 80% of whatever the amount would otherwise be.  Really strange mentality...

But in the assessment you should also assess how much your time is worth.

Working to get extra cash and paying any of it to the taxman can be seen as being a significant disincentive. Perhaps that's the context of many people that have now stopped working.

Contentment is not always about cash!

pinnks

The trouble with your maths is that each year you buy adds £5.82 to your pension.  3 years there buys you 3 x  £5.82 = £17.46.  If you can only buy those 3 years, then you can only increase your pension to £201.86.

£17.46 per week is £907.92 per year before tax, or £726.33 after tax.  It will take just over 2 years to recoup the investment.

molerat

Those 3 post 2016 years will take you to £201.87 adding £17.47 to your current amount and taking 90 weeks to recover gross.  Well worth the outlay. Even if you do nothing else 18-19 is extra specially worth it, a single £21.89 to give you £5.82 per week.

Dazed_and_C0nfused

IanBerry said:

molerat said:

Not sure how you are going to get £19 from 3 years ? 3 years will produce £17.46 max.  Your sums don't add up.  What is your exact pension amount and which years are showing as not full and cost each ?

OK to be exact as you have requested it: I currently receive £184.4 per week. The max state pension is £203.85 a difference of £19.45. So the voluntary contribution total cost over the 3 years where shortfall occurs of £1578 when divided by the potential increase of 19.45 equates to 81 weeks. The years where the shortfall occurs are 2018-19 (£21.89), 2019-20 (£760.8) 2020-21 (£795.6) where I had no earned income other than my military pension and my pension from my post service employment. So in terms of achievable increase taking the tax paid on other income into consideration I would receive an additional £15.56 per week at a cost of £1578 means in actual fact it would take 101 weeks to break even. 

If you purchase those 3 years you will have a one off outlay of £1578.29.

In return you will add £17.46 per week to your State Pension.  Which is £907.92/year.
Say £726 after factoring in the extra tax.

From April 2024 that £726 will be more like £760 with the triple lock increase.

So after a little over 2 years you will have recouped your original outlay of £1578 and everything after that is pure profit.

Can you find a better investment for your £1578?

IanBerry

Thanks for your feedback guys, I knew my maths wasn't too far out 'in principle' but I confess not being fully up to speed with the finite details. The payment of £21.89 to get a return of £5.82 sounds like a good deal to me and I shall be following this up. Just for info, I actually wanted to work to retirement age but two major heart operations between 2019 and 2021 put paid to that.