I’ve already got a small UK pension and have observed that, as it has risen in value over the years, it has pushed my total income (from my private pension plus my Irish state pension) into a higher tax band. The effect is I’m paying more tax, which could eventually wipe out any gains.
So, is it actually worth my while to attempt to increase my UK pension by buying back years?
Ms C.L.
With the deadline looming for anyone who worked for a time in the UK looking to buy back national insurance years to secure or boost their UK state pension on retirement, we will be addressing reader queries every day for the next week to try to provide some clarity on issues arising.
It is important to note that any additional income you get from the UK state pension as a result of buying back additional years is taxable in the same way as any other income you have is taxable.
If you are tax resident in Ireland and Irish domiciled – as most people will be – then you are liable to Irish income tax on your worldwide income.
There are exemption limits for people over the age of 65, under which they do not pay any income tax. For a single person or a widow(er), this is €18,000. That doubles to €36,000 for married couples or those in a civil partnership. For couples, this exemption applies if either of them is aged 65 or over.
If your income is above those limits, you are liable to income tax. If you are single and your income is above €44,000, you will be paying income tax at the higher rate on anything above that figure. For couples, the 40 per cent threshold kicks in at €53,000 where there is one income, and as high as €88,000 where there are two.
The Irish State pension, at €278 a week, is worth around €14,500 a year.
While PRSI is not an issue once you are drawing down the State pension, you will also be liable to the universal social charge though, for most pensioners, that will be capped at 2 per cent.
In your case, you have income from three sources – the Irish State pension, a UK state pension and a private pension.
Many people in receipt of private pensions these days draw them down through a more flexible Approved Retirement Fund which you are obliged to draw down at the rate of 5 per cent a year – well not obliged but Revenue will tax you on the basis that you have done so, so you might as well.
If you are taking more than 5 per cent out of the annuity, you can reduce that drawdown to help you lower your tax liability.
If you are paid via an annuity, you are kind of stuck as that pays a set amount agreed at the outset when you bought the annuity.
Value for investment
That aside, if you are paying tax at 40 per cent, is it worth buying back years of national insurance to fill gaps in your record and increase your existing UK pension?
Yes, it is. At the UK state pension rate of £231.25 (€277.43) from April 5th, each additional year you buyback will give you extra pension income of £6.58 a week, or £342.16 a year.
Taxed at 40 per cent, your net pension income per year acquired will be £205.30. So you’re still ahead.
Of course, you have to pay for that year. Assuming it is at the cheaper Class 2 rate, that will have cost you £179.40. But that’s a one-off payment. And, even in year one, you are ahead – albeit by a modest £25.90 sterling over the year. Thereafter, you will be over £200 better off.
If you are over a certain age, it is academic as you won’t be allowed to make voluntary national insurance payments. The cut-off for women is that you must have been born after April 5th, 1953 (ie 71 years old at present or younger). For men, the cut-off is April 5th, 1951.
The big thing here is time. Anyone who is in any doubt on whether they have done enough to make sure they have met the April 5th deadline should fill in a callback form that you can find here, screenshot it and send it. The British authorities have accepted that anyone filing that form by the deadline will be considered to be eligible for the scheme.
Over the coming days, we will talk about concerns over clashes with PRSI, delays in hearing back on your application, appealing your case and missing national insurance numbers among other things.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
