NI Class 1, 2 & 3 Clarification... PLEASE!

efunc

So I finally called The Future Pension Center and got a breakdown on my NI contributions to date, and my qualifying years. Quite interesting, and puts me in a small dilema.

I'm 39yrs old and have been self employed all my life, but have entered full-time employment 2yrs ago.

The FPC told me I currently have 9 qualifying years and require 21 more years to qualify for the full state pension.

1996 – 2003 outstanding contributions can still be paid by 5th April 2009 at the latest to qualify.

2003 – 2006 however will need to be paid at a higher rate, or something?

During much of my Self employment I was exempt NI Contributions due to low earnings (on my Class 2 contributions) so no one was chasing me for them. If I pay these years now I will apparently be paying at the Class 3 contribution rate (voluntary contributions).

It makes sense I guess to pay the cheapest years first, as below, so that I could acheive perhaps 15 qualifying years under my belt:

1996 - £309 to pay
1997 - £84.40 to pay
1998 - £31.25 to pay
1999 - £335.40 to pay
2000 - £340.60 to pay
2001 - £350 to pay
2003 - £405.60 to pay

What I'm having trouble understanding is that as I was Self-Employed I was paying Class 2 contributions which as I understood it didn't earn you a full State pension anyway, but a reduced State Pension. I'm now working Full Time so am paying Class 1 contributions on a salary of £38k a year. If I pay some of these earlier years off I think it could be a good thing, but is it really that simple?? I pay my early years off as Class 3 contributions and continue with my current Class 1 contributions and the whole lot goes into one pot with my existing Class 2 contributions to go towards my Full State Pension on retirement??

And then there's the matter or surplus contributions apparently which may get an earnings related State Pension.

Can one of you knowledgeable folk clarify for me please?

thank you so much!

seven-day-weekend

As far as I understand, paying Class 1,2 or 3 contributions will count towards your Basic State Pension, but only Class 1 count towards the Second State Pension (S2P or Serps) which in some cases can be nearly as much again.

You need 30 years from any or all of these to get your full Basic State Pension and if you have paid enough Class 1s and not been opted out into a personal or Occupational scheme you will have some S2P as well.

The full Basic State Pension is around £89 a week, I believe.

If I'm wrong I'm sure the resident experts will be around to correct me!

EdInvestor

efunc wrote: »

I'm 39yrs old

Thus you will retire at age 66, with 26 years to go.

The FPC told me I currently have 9 qualifying years and require 21 more years to qualify for the full state pension.

Thus you do not need to pay any back years, as long as you pay from now on (which you have no choice about if you are employed anyway).

However

It makes sense I guess to pay the cheapest years first, as below, so that I could acheive perhaps 15 qualifying years under my belt:

I would agree that buying a few cheapo years is not a bad idea, just in case you end up having to buy voluntary NICs again in future.

What I'm having trouble understanding is that as I was Self-Employed I was paying Class 2 contributions which as I understood it didn't earn you a full State pension anyway, but a reduced State Pension.

No, classes 1, 2 and 3 conts all entitle you to a full basic state pension.

And then there's the matter or surplus contributions apparently which may get an earnings related State Pension.

This is probably where the confusion lies. Voluntary NICs (2 and 3) don't entitle you to the state second pension (S2P,formerly SERPS) which is earnings related. You will start accruing S2P from when your full time job commenced.

Brum_Man

EdInvestor wrote: »

Voluntary NICs (2 and 3)

Class 2 aren't voluntary, they are just a flat rate for the self employed and non profit related.

efunc

Thanks for filling in the blanks for. It's all starting to take shape now. I think it would be wise to pay off about 4 or 5 earlier years since you never know what the future holds. I may be out of work, redundant, or decide to throw in the towel at 55 and I'll still have 30yrs of qualifying contributions. Right?

EdInvestor wrote: »

Voluntary NICs (2 and 3) don't entitle you to the state second pension (S2P,formerly SERPS) which is earnings related. You will start accruing S2P from when your full time job commenced.

OK, thanks Ed. That introduces an interesting element. How significant might this S2P be if I'm only paying into it for, say, only 15 years? Is this what many people opt out of to invest in other schemes?

seven-day-weekend

If you are in an Occupational or Private Pension scheme, you will be opted out of S2P, otherwise you are automatically in. Everybody who pays contributions is automatically into the basic State Pension, ebven if they are opted out of S2P.

cosyc

I thought you could only pay the six previous years so you could only pay 2001 and 2003. Has there been a chnge in the rules?

efunc

cosyc wrote: »

I thought you could only pay the six previous years so you could only pay 2001 and 2003. Has there been a chnge in the rules?

Maybe so, I'm not sure. But I was just told that I can definitely pay from 1996 onwards, and that I have until April 2009 to do it.

efunc

seven-day-weekend wrote: »

If you are in an Occupational or Private Pension scheme, you will be opted out of S2P, otherwise you are automatically in. Everybody who pays contributions is automatically into the basic State Pension, ebven if they are opted out of S2P.

That's certainly not the case for me. I'm in the Prudential Group Personal Pension scheme at work and the documents state that the scheme provides the facility to opt out of S2P, but it's not the default by any means.

I think I'll be keeping it this way. There's no sense in gambling my S2P, no matter how small. I've plenty more to gamble if need be...

seven-day-weekend

efunc wrote: »

That's certainly not the case for me. I'm in the Prudential Group Persinal Pension scheme at work and the guide book says that the scheme provides the facility to opt out of S2P, but it's not the default by any means.

I think I'll be keeping it this way. There's no sense in gambling my S2P, no matter how small. I've plenty more to gamble if need be...

I've obviously misunderstood then. Sorry if I have.I would like someone then to clarify please, because I understood that if you were in a Personal or Occupational pension, you were automatically opted out of S2P. If this is not correct then I would like to know so that I don't give anyone else wrong advice.Thanks.

Brum_Man

seven-day-weekend wrote: »

I understood that if you were in a Personal or Occupational pension, you were automatically opted out of S2P.

No you aren't automatically opted out, the two have no bearing on each other.