Interaction of voluntary NICs and deferring

nickane

I have a complicated State Pension situation and none of the helplines (MoneyHelper, DWP, HMRC, Future Pension Service) seem able to answer my questions, each fobbing me off to one another.  So, I'm turning to the wealth of knowledge I've witnessed here over the years for advice.  I'd appreciate any help you can give.  I'm pretty financially savvy but the State Pensions guidance for any non-straightforward case is pretty woeful.  I tried reading a few related threads but couldn't find specific answers to all these questions.

I have an elderly relative who is 71 but should have reached SPA just before she was 65.  She has been unable to manage her financial affairs for some time but refused any help until recently.  It turns out that despite complaining a lot at the time about the SPA rising from 60 to 65, she never managed to claim once she reached SPA, nor asked for anyone's help.  She was living very frugally, but eventually her circumstances became unmanageable and she's finally accepted help.  It seems she still has enough savings to be ineligible for pension credit, though not by much.

Her NI record is missing 15 years, though online, it says she can buy 12 (2006-2017).  However, as she is past SPA, she can't actually buy them online.  We have to wait for a calculation in the post to do this, even though we can see exactly how much we have to pay online.  The calculation apparently takes 6-8 weeks.  We requested it 7 weeks before the end of the tax year, when the voluntary NIC rules change and she'll presumably only be able to buy 1 or 2 of those 12 years.  As I understand it, paying for voluntary NICs will only increase her SP eligibility from when the funds clear, regardless of what years' NI she's buying.  As such, my initial plan to backdate the pension as far as possible and buy as many NI years as possible is possibly not ideal, as she'll only get 20/35ths of SP for the last year.

I have a ton of questions but none of the helplines I've called are much help and often tell me different things.

1) Is it true that we have to wait for this letter to pay voluntary NICs? Obviously, if it doesn't arrive on time, she's out loads of income for the rest of her life until her savings dwindles and she becomes eligible for Pension Credit.  She has no private pension that we're aware of.  If there's a way to do it sooner, I'd sleep a lot easier for the next month.

2) How are they getting on with sending out these calculations? I think they said "they take up to 6-8 weeks" rather than just "they take 6-8 weeks".  We got her a new passport in under a week.

2) Moneyhelper claimed that, as she's already passed SPA, she can only buy up to 6 years of voluntary NICs and, since she's 6 years past SPA, she won't be able to buy any of those years anyway.  Is this true? Why would the DWP/HMRC agree to send her a calculation, if so?

3) They say you get 1% for every 9 weeks you defer.  Is this calculated to the nearest day/week/year? They make it sound as if it only works in full 9 week intervals, but then they also say 5.8% per year.  Is the latter just a rough number to help people do the maths, but in fact people who defer for exactly one year only get 5%? It sounds like I need to make sure the pension starts some multiple of 9 weeks and a day or two after she reached SPA to maximise uplift from deferring.  Or is it 5.8% for every year and then 1% for every 9 weeks in the final year? I'm afraid even MSE's guidance regarding deferring isn't clear on this point.

4) Does the uplift from voluntary NICs made after SPA compound with the increase from deferring? Or will she only get 1% extra for every 9 weeks she deferred upon the 20/35ths of her pension she was due to receive when she reached SPA.  DWP said so.  They said the uplift from deferring is "interest" on the payments she's deferred and that she'd have had to have a full NI record at SPA to get the full deferral increase of 1%.  Nowhere else have I seen this referred to as "interest" and no other pension gives an uplift for deferring because of interest upon foregone disbursements.  Annuities pay more to people who buy them when they're older simply because they're expected to die sooner, surely?

5) If the uplift from voluntary NICs made after SPA does compound with the uplift from deferring, how much difference will it make to wait until she's hopefully made the voluntary NICs before applying for the pension? DWP encouraged me to apply and backdate as far as possible.
The way I see it, there's basically 3 scenarios.
i) Deferring and voluntary NICs after SPA don't compound, just as the DWP said.  She'll only ever be able to get the uplift from deferring upon the 20/35ths of the State Pension she was eligible for when she reached SPA:
£131.57/week [= £230.25 * 20/35] as standard
£6.58/week [= £230.25 / 35] extra for every year she's able to buy
£1.32/week [= £131.57 * 1%] extra for every 9 weeks she's deferred

ii) voluntary NICs only compound with uplift from deferring if they're made before SP is claimed (rather than before reaching SPA as in (i)).  In which case, waiting until the vNICs have been made will to claim will benefit her, as she'll also get:
£0.0658/week [= £6.58/week * 1%] for every year she's able to buy for every 9 weeks she's deferred
e.g. £31.58 if she's deferred 40 weeks and is able to buy those 12 years

iii) voluntary NICs compound with uplift from deferring whenever they're made and she has the option of backdating up to 1 year, albeit only receiving 20/35ths of the 2024/25 State Pension, without risk of it jeopardising the extra money she'd receive in (ii), for any future payments after the vNIC funds have been cleared.  (But she'd receive less uplift from deferring, as she'll have deferred for a year less.)

I probably have other questions, but that's quite enough for now.  If you've read this far without skipping, my sincere thanks.  If you can answer any of the above, your help would be much appreciated.

xylophone

It seems she still has enough savings to be ineligible for pension credit, though not by much.

Have you checked?

https://www.ageuk.org.uk/siteassets/documents/factsheets/fs48_pension_credit_fcs.pdf

Marcon

Was she born before 6 April 1953? 

nickane

Nope, tail end of 1953

nickane

xylophone said:

It seems she still has enough savings to be ineligible for pension credit, though not by much.

Have you checked?

That looks very detailed.  I'll read that, thanks. 

As I understand it, PC tops up your pension to £227.10, but every £500 of savings over £10,000 counts as £1/week.  So, someone who hadn't made 10 years of NICs and gets zero SP, but had £120k in savings would get no PC nor SP until their savings starts to dwindle.  She doesn't have that much, but even if she backdates 12 months and can't make any voluntary NICs, she will get £175/week.  So, she'd only need £36k in savings to be ineligible for PC.  We're still trying to get a full picture of her finances, but I think she'll have quite a bit more than that.

Marcon

nickane said:

Nope, tail end of 1953

Thank you.

Could I suggest you pare down your 'ton of questions' and focus on the things which really matter to the outcome, otherwise I think this boat might sail without your elderly relative safely on board...

nickane said:

As I understand it, paying for voluntary NICs will only increase her SP eligibility from when the funds clear, regardless of what years' NI she's buying.  As such, my initial plan to backdate the pension as far as possible and buy as many NI years as possible is possibly not ideal, as she'll only get 20/35ths of SP for the last year.

1) Is it true that we have to wait for this letter to pay voluntary NICs? Obviously, if it doesn't arrive on time, she's out loads of income for the rest of her life until her savings dwindles and she becomes eligible for Pension Credit.  She has no private pension that we're aware of.  If there's a way to do it sooner, I'd sleep a lot easier for the next month.

Before you make any payments to HMRC you must contact the Pension Service at the Department of Work and Pensions to confirm if paying for particular years will increase your pension. Their contact details are 0800 731 0175 if you are below state pension age and 0800 731 7898 if you’ve reached state pension age.
If you do not confirm this with them, and at a later date find out that your payment has not increased your pension, you will not be entitled to a refund.
The only way to obtain your 18 digit reference number is to contact HMRC on 0300 200 3500, however our lines are extremely busy and customers are having problems getting through to an advisor. Alternatively, you can pay by cheque. Please see information below.
You can pay by sending a cheque to:
HM Revenue and Customs
National Insurance Contributions and Employer Office
BX9 1AN
Allow 3 working days for your payment to reach HMRC.
Make your cheque payable to ‘HM Revenue and Customs only’.
Write your name and National Insurance reference number on the back of the cheque. 
Do not fold your cheque.
Include a letter with:
•    your name, address and phone number
•    your Class 3 National Insurance contributions reference number (or National Insurance number)
•    how much you’re paying
•    the period you’re paying for
If you would like a receipt for your cheque, please also request this on your letter.

Link: https://community-origin.hmrc.gov.uk/customerforums/sa/c8f2046b-4ab7-ed11-9ac4-00155d9c773d

It's worth a browse on that site - there are some more up to date answers, but I think the info I've pasted above is the most important bit.

3) They say you get 1% for every 9 weeks you defer.  Is this calculated to the nearest day/week/year? They make it sound as if it only works in full 9 week intervals, but then they also say 5.8% per year.  Is the latter just a rough number to help people do the maths, but in fact people who defer for exactly one year only get 5%? It sounds like I need to make sure the pension starts some multiple of 9 weeks and a day or two after she reached SPA to maximise uplift from deferring.  Or is it 5.8% for every year and then 1% for every 9 weeks in the final year? I'm afraid even MSE's guidance regarding deferring isn't clear on this point.

It's 1% for every 9 weeks and so far as I can see, it's done in complete weeks. A few days either way really isn't important in the grand scale of things. 

4) Does the uplift from voluntary NICs made after SPA compound with the increase from deferring? Or will she only get 1% extra for every 9 weeks she deferred upon the 20/35ths of her pension she was due to receive when she reached SPA.  DWP said so.  They said the uplift from deferring is "interest" on the payments she's deferred and that she'd have had to have a full NI record at SPA to get the full deferral increase of 1%.  Nowhere else have I seen this referred to as "interest" and no other pension gives an uplift for deferring because of interest upon foregone disbursements.  Annuities pay more to people who buy them when they're older simply because they're expected to die sooner, surely?

Does it matter whether it's described as interest or anything else, or how annuities work? If she can increase her pension by paying voluntary NICs, that's the important bit. Don't get distracted by the detail unless it's essential - and this isn't essential.

DRS1

I thought the state pension was £221.20 pw unless you had some extra pension from SERPS or S2P.  Where did the £230.25 figure come from?
Depending on what the most she can achieve is she may not need all 12 years to get there from £175pw so you ought to wait for the calculation.  Is there any way it can be done over the phone?  You and her on a speakerphone?
Presumably the usual state pension forecast does not show for her if she goes online?
You need someone like @molerat to help with the calculations.  There was another thread on here about deferring which did I think suggest that there was some magic to waiting for the 9 weeks to be up - but if she has waited 6 years does she really want to wait any longer?

DRS1

Oh and where did the 20/35 calculation come from?  I suspect someone may tell you that 35 years is not a relevant figure for someone like your relative with pre 2016 years in the equation.

Dazed_and_C0nfused

DRS1 said:

I thought the state pension was £221.20 pw unless you had some extra pension from SERPS or S2P.  Where did the £230.25 figure come from?
Depending on what the most she can achieve is she may not need all 12 years to get there from £175pw so you ought to wait for the calculation.  Is there any way it can be done over the phone?  You and her on a speakerphone?
Presumably the usual state pension forecast does not show for her if she goes online?
You need someone like @molerat to help with the calculations.  There was another thread on here about deferring which did I think suggest that there was some magic to waiting for the 9 weeks to be up - but if she has waited 6 years does she really want to wait any longer?

I suspect the op is already using the new rate effective from April 2025.

But I agree re your later point about 35ths.

I think the op is getting confused with someone born this century.  And the actual details of the existing State Pension entitlement would probably be helpful.

nickane

Thanks for all your answers so far.  Clearly, I've gotten muddled up about a number of things.  I'll take @Marcon's advice and try and make the questions simpler.  To answer your points...

1. @Marcon We've called the pension service with her on speakerphone to order the calculation letter but not since viewing the NI record.  It sounds like I need to skip yet another day's work and spend some time on the phone with her again during working hours to find out her 18-digit payment ref from HMRC and how much she needs to pay from the DWP, now that we have access to her NI record via government gateway.  Waiting for the calculation letter they've already agreed to send seems very risky.

You've essentially answered my first question.  Thank you.  I'll sign up to the HMRC forums and have a dig around.

2. @DRS1 & @Dazed_and_C0nfused I don't know her pension entitlement.  Once you get past SPA, that info is really hard to get at.  I suspect I need to call DWP with her in the room again to learn that too.  She's agreed to give me Lasting Power of Attorney but we haven't done the forms yet and it'll take a while to sort, whereas this is time-critical.  Government Gateway doesn't show a forecast once you pass SPA.

3. She needs to apply for her pension ASAP and ideally backdate as far as possible.  According to MSE, she would also greatly benefit from making as many voluntary NICs as she can to get closer to a full record.  I don't want to have to think about 9 week intervals, whether to wait until her NI record is more complete before claiming her pension, whether or not backdating as far as possible once that happens will cost her the uplift from the voluntary NICs for the backdated payments etc.  Ideally, we'd just be able to apply ASAP, backdate as far as possible and when she improves her NI record, they'd send her a lump sum for all the money she'd have got in the past year if she'd made the voluntary NICs before claiming.  But DWP were clear enough on the phone that it doesn't work like that.  So, I need more detail which they couldn't give me.

3. @Marcon Agreed, a few days here and there don't matter.  If they round to the nearest week rather than work in 9-week blocks, I could care less.  Thanks again.

4. @Marcon The point about whether it's "interest" is not just semantics.  The person on the phone from DWP said that it didn't matter when she made the voluntary NICs and she should just backdate as far as possible, because she wasn't going to get any 30-40% uplift from having deferred upon the uplift from making voluntary NICs, as the uplift from deferring is just to compensate her for foregone interest from not having claimed in the last 6+ years.  That sounds like nonsense to me.  They give you more for deferring because you'll claim for less years by the time you die.  Surely, if you get 30-40% more from deferring and you later improve your NI record, they give you 30-40% extra on the uplift you get from doing that too.

5. Yeah, I'm using 2025/26 numbers because, unless we backdate, the 2024/25 numbers aren't relevant to her.

6. To clarfiy, she is born in late 1953 and reached SPA in July 2018.  So she can only backdate 12 months and the transitional arrangements are relevant to her.

Here are my new questions:

1. Is there a way I can find out her SP entitlement without having to take a day off work, driving 90 mins each way to visit her when the phone lines are open and spending ages on the phone with her in the room? There's no online calculator I can find.

2. If you're a woman born in late 1953, who came of SPA in July 2018, were never contracted out and have 20 qualifying years of NI contributions, how many qualifying years would you need to get a full SP, if not 35?

3. It sounds like your issue with my 20/35 fraction isn't just the denominator but maybe also that the relationship between qualifying years and SP entitlement isn't linear i.e. having 30 qualifying years doesn't get you 50% more SP entitlement than having 20 years for people not born this century.  Is that the case?

(I'm amazed that there's no online calculator for this, but if the logic behind the State Pension entitlement calculation is published somewhere, I can almost certainly figure it out without waiting for the calculation letter.)

4. Here's the main question, previously split as 4 and 5.  It's very hard to keep this pithy, but I'll try.  If she makes voluntary NICs after claiming, having deferred to the point where she gets, say, 33% more for having done so, does she get 33% extra from having made those voluntary NICs than someone of the same gender and birthday would, ceteris paribus, if they had made the voluntary NICs before reaching SPA and not deferred? The man I called at the DWP said she wouldn't.  I suspect he's wrong.

5. What about if she waits to claim until she's made the voluntary NICs and backdates?

6. What about if she waits to claim until she's made the voluntary NICs and doesn't backdate, i.e. all pension payments are made effective on a date after she has a more complete NI record?

Marcon

nickane said:

Thanks for all your answers so far.  Clearly, I've gotten muddled up about a number of things.  I'll take @Marcon's advice and try and make the questions simpler.  To answer your points...

1. @Marcon We've called the pension service with her on speakerphone to order the calculation letter but not since viewing the NI record.  It sounds like I need to skip yet another day's work and spend some time on the phone with her again during working hours to find out her 18-digit payment ref from HMRC and how much she needs to pay from the DWP, now that we have access to her NI record via government gateway.  Waiting for the calculation letter they've already agreed to send seems very risky.

You've essentially answered my first question.  Thank you.  I'll sign up to the HMRC forums and have a dig around.

I'm not sure you do need to wait for the infamous 18 digit number before you pay. Looking at the answers on HMRC's Community Forum, sending a cheque with the relevant details (crucially her NI number) seems to be enough - and other posts on that site mention HMRC 'honouring the date of receipt as the date of payment'.


3. She needs to apply for her pension ASAP and ideally backdate as far as possible.  According to MSE, she would also greatly benefit from making as many voluntary NICs as she can to get closer to a full record.  I don't want to have to think about 9 week intervals, 

You don't need to think about 9 week intervals. In the grand scale of things it really isn't going to matter enough to potentially delay things.


4. @Marcon The point about whether it's "interest" is not just semantics.  The person on the phone from DWP said that it didn't matter when she made the voluntary NICs and she should just backdate as far as possible, because she wasn't going to get any 30-40% uplift from having deferred upon the uplift from making voluntary NICs, as the uplift from deferring is just to compensate her for foregone interest from not having claimed in the last 6+ years.  That sounds like nonsense to me.  They give you more for deferring because you'll claim for less years by the time you die.  Surely, if you get 30-40% more from deferring and you later improve your NI record, they give you 30-40% extra on the uplift you get from doing that too.

The reality is that time isn't on your side to argue the finer points. Miss the deadline and it's game over for your elderly relative's one-off opportunity to enhance her pension.


2. If you're a woman born in late 1953, who came of SPA in July 2018, were never contracted out and have 20 qualifying years of NI contributions, how many qualifying years would you need to get a full SP, if not 35?

Impossible to guess, because much would depend on her earnings and the amount of State Additional Pension she built up during her working years (and if she was never contracted out, she'd have built up at least some, unless an exceptionally low earner, and/or paying Married Women's reduced rate NI). If that would give her a 'better' starting point that the new state pension, that would be used as the baseline on which future years would 'build' - the same issue which impacts on everyone under 'transitional' arrangements.

3. It sounds like your issue with my 20/35 fraction isn't just the denominator but maybe also that the relationship between qualifying years and SP entitlement isn't linear i.e. having 30 qualifying years doesn't get you 50% more SP entitlement than having 20 years for people not born this century.  Is that the case?

(I'm amazed that there's no online calculator for this, but if the logic behind the State Pension entitlement calculation is published somewhere, I can almost certainly figure it out without waiting for the calculation letter.)

Not a chance. You are hopelessly underestimating the complexities of a system which has been around for many decades, applies to the whole UK population, and is complicated by so many factors (employment overseas, inherited pension when a spouse dies, endless changes to the rules etc etc).

4. Here's the main question, previously split as 4 and 5.  It's very hard to keep this pithy, but I'll try.  If she makes voluntary NICs after claiming, having deferred to the point where she gets, say, 33% more for having done so, does she get 33% extra from having made those voluntary NICs than someone of the same gender and birthday would, ceteris paribus, if they had made the voluntary NICs before reaching SPA and not deferred? The man I called at the DWP said she wouldn't.  I suspect he's wrong.

Stick to what she could get. Don't waste time on hypothetical questions - the man at the DWP was probably correct, but it's not possible to prove either way, nor is it going to impact on this lady's outcome.

5. What about if she waits to claim until she's made the voluntary NICs and backdates?

6. What about if she waits to claim until she's made the voluntary NICs and doesn't backdate, i.e. all pension payments are made effective on a date after she has a more complete NI record?

You've making such strenuous efforts to help this lady. I wish there could be a clear, simple answer to all you are asking, but there are far too many 'what if...' questions to answer when the deadline is just over a month away. At some point, and one which is rapidly approaching, it will be a case of holding her nose and jumping (or more likely you holding...).

I wonder if the reality is that if she uses her savings to pay voluntary NI, it would take her income and savings below the level at which she'd qualify for Pension Credit, so might in truth be no disaster if she pays 'too much' NI to derive full benefit from doing so?

Worth putting her details into gretel.co.uk just to check if that flags up any accounts/private pensions she has totally overlooked.