Who doesn’t want a bigger pension? That’s been the impetus behind a surge in applications for the British department of work and pensions in recent weeks.
But why should that matter to readers of an Irish personal finance newsletter?
Many of those affected are Irish unsurprisingly. Hundreds of thousands of Irish people have worked in the UK for some of their lives. They may have moved back home since, or further afield but they had made contributions towards a state pension entitlement in the UK through their national insurance (NI) contributions while living there.
The issue is that a deadline is looming, specifically a deadline allowing people to pay money to plug gaps in their NI record that can help increase the pension they might expect to receive.
Like all these things, everyone leaves it to the last minute. These transitional arrangements have been in place since the new pension came into being in 2016 but people either did not know about it or, as with so many things pension-related, they just put off dealing with it until “some time in the future”.
Well “some time” has arrived and the department of work and pensions in the UK has been overwhelmed as people rushed to get their affairs in order before a deadline that was looming in just four weeks – April 5th.
The good news for anyone yet to get started is that the UK government announced earlier this week that it would extend that deadline, but not by much. Anyone who worked in the UK, feels they might benefit from buying back some extra years of NI and has the money to realistically consider it has until July 31st to get things sorted.
There have been a few iterations of the state pension in Britain. The most recent of these was introduced in 2016 – called the New State Pension. Before this there was a twin track system of a basic state pension and an additional pension. Both were related to your NI contributions but the additional pension was also tied to your earnings and could be affected by your access to certain state welfare supports.
At the time, it was possible to contract out of this element of the state pension and many did so, generally putting the additional NI contributions they would have paid towards an occupational or private pension.
Post 2016, there is now only one state pension but many people would be eligible only for a lower weekly pension payment. There could be all sorts of reasons for this – taking a career break or even just changing jobs with a few weeks between one and the other. Or you might have been caring for a child or older family member, or maybe just been out of the country. You might even have missed out because your earnings were below a certain threshold for a time.
The new pension also requires 35 years of NI contributions from people entering the workforce after that date where the previous state pension in its latter years required only 30 years of contributions.
But these need to be full years of contributions. Many people might have paid 40-plus contributions but, because they were short of the 52, none of that year would count towards their pension record.
Those gaps could prove costly and, in general, the UK system only allows you to go back six years for the purpose of making voluntary contributions. With the current tax year ending on April 5th, that means you could only fill in gaps going back to April 6th, 2017.
However, under the special transitional arrangements for the new state pension, you can go back a further 11 years, to 2016.
That’s a significant benefit, especially for people who have just small gaps in one or more of those years. The pension benefit could be a multiple of the amount you would be required to pay in voluntary NI contributions.
The sums might not make sense for everyone but, if you think it might be worth your while, now is the time to get it sorted.
So how much will it all cost. That’s not a black and white issue but Martin Lewis, the British personal finance expert and founder of MoneySavingExpert.com, calculates that each voluntary year claimed will cost about £825 (€932) and will add £275 (€311) to your state pension.
That means you would need to draw down your pension for three years to benefit from the arrangement. On the basis of current life expectancy, Mr Lewis says, each £800 (€904) is likely to deliver a return of between £5,300 (€5,987) and £5,800 (€6,552) even before taking into account the impact of inflation on future headline pension payments.
He says partial years could be fleshed out for as little as £15 (€17) but he does caution that the whole process may be of no use to people who had contracted out of the additional pension before 2016.
So if you worked in the UK at some point, what do you have to do next?
Assuming you’re not yet of retirement age, the first thing is to go to the UK pension website. You’ll need to dig out your old NI number.
The site gives you a forecast of the state pension that you can expect to receive. It will also go year by year through your working life and let you know whether that year will count towards your state pension. Finally, it will give you an indication of how much it will cost to plug any gaps in your record.
If you don’t have your NI number to hand, it will have to be reissued which, as a colleague discovered, will take a number of weeks.
Mr Lewis says your next step is to contact the Future Pension Centre for a personalised calculation. From outside the UK, you can call +44 191 2183600 or, if you are based in Northern Ireland, 0800 7310175.
Finally, if you decide to go ahead, you will need to contact the UK tax office to arrange to pay the amount and have the missing NI periods credited to your record. Given the various steps involved and the pressure on the service by others in the same position, the 20-odd weeks to the new deadline won’t be long passing.
As BDO tax partner Paul Falvey said: “Making voluntary contributions won’t always increase your state pension entitlement, but for those who are eligible, a modest outlay to top up incomplete or full years missing from your record may mean a significant boost to your state pension.”
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here. Also, to ensure you continue to receive On The Money, be sure to add the email address you receive the newsletter from to your safe senders list.