How to top up and boost your state pension: Steve Webb’s golden rules
Buying state pension supplements can give a huge boost to retirement income, but people often wonder if it’s worth it for them personally.
You’ll need to check your National Insurance records to find out what you’ve already paid in a state pension, then decide whether you need to supplement and, if so, which years to fill in the gaps or buy from scratch.
At the moment, the usual six-year deadline to do so has been extended to 2006/2007 – a special deal that was due to expire on April 5, but after a telephone outage, the deadline for buying state pension supplements was pushed back to July 31.
AOW supplements: discover how you can increase YOUR pension income
Former Pensions Minister and This is Money columnist Steve Webb has a free website about buying state pension supplements to help savers through the tax process.
Webb, now a partner at LCP, says the site is designed to help people “decipher” the information they get about their National Insurance data from the government’s site and figure out whether it makes sense to apply for their state pension. to fill.
How much does it cost to increase your state pension?
A year of voluntary national insurance contributions costs £824.20 at the current ‘Class 3’ rate, or less if you fill in part of the year.
“At best, supplementing your state pension can be a very cost-effective way to secure a higher income in retirement,” says Steve Webb.
In many cases this will increase state pension entitlements by 1/35th of the standard rate, or around £275 a year.
“This means that someone who tops up with one year will get their money back within four years after taking out their pension, even taking into account the base tax.”
Webb says someone receiving a state pension for 20 years will get back £4,400 (excluding base tax) for an initial outlay of £824.20 at current rates.
What should you know before buying reloads?
Steve Webb believes the Website ‘check your state pension’ of the government provides useful information, but does not help people decide in which years, if any, they should top up.
The LCP website helps close the gap for those covered by the ‘new’ state pension scheme launched in April 2106 – so men born on or after April 6, 1951 and women born on or after April 6, 1953.
It goes like this:
– Users are asked for information about their personal National Insurance record from Gov.uk site first
– They are asked for basic details about their age and what is on that file – this is not held by LCP
– The site then interprets that information to explain users their options
– Users are warned to always check with the Ministry of Work and Pensions that supplementing the identified years will definitely increase their state pension before paying any money.
Webb says that in some cases the LCP site will simply confirm what users have already concluded, but he hopes it will help others discover the potential of upgrades.
He adds that there are two groups for which top-ups may be of particular interest. First, civil servants who took early retirement and participated in a contractually agreed occupational pension scheme that reduced their AOW below the maximum amount.
And second, the self-employed who may have gaps in their NI record and can go back to any year since 2006/07 to fill it.
Do you find it difficult to buy top-ups?
This is Money gets a lot of complaints from readers about the confusing and sometimes chaotic system of the state pension supplements.
A constant annoyance is that the information line is run by the DWP but the top up payments have to be made to HMRC who also hold the NI records.
In the past we have dealt with numerous cases of depositors innocently buying worthless top-ups and initially being refused refunds before HMRC pulled out and started issuing them on a routine basis.
And we’ve seen cases of savers paying thousands of euros for state pension supplements and seeing their money disappear for months without explanation, until This is Money stepped in.
Meanwhile, some people have been waiting months for confirmation from the Department of Work and Pensions about which years to buy and what amount and how to pay.
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Steve Webb’s golden rules for buying state pension supplements
1. Make sure you get all the credits you are entitled to before paying voluntary NI for a given year.
For example, grandparents who are not yet of retirement age can receive state pension credits if they care for a grandchild, so that the child’s parent can go to work.
Since NI credits don’t cost anything, you should always claim what’s available for free before paying voluntary NI for any given year.
2. Whether it makes sense for a particular person to top up depends on their individual circumstances.
You should always start by checking your AOW details on the government web page.
This can tell you, for example, that you already receive the maximum state pension and therefore do not have to make a voluntary contribution, even if you have some gaps in your file.
Filling in blanks for certain years – especially those before 2016/17 – can sometimes have no impact on your state pension, especially if you were outsourced and already paid over 30 years in April 2016
3. Some years may be cheaper to fill than others. For example, if you worked part of a year, you may be able to complete that year cheaper than a year that was completely blank.
4. Fill gaps at the Class 2 rate if you can, as Voluntary NI is much cheaper for the self-employed than for employees – currently £163.80 per annum, instead of Class 3 contributions at £824.20 per annum.
If you were self-employed on a low income in a given year and have a gap in your record, you should be able to pay at the Class 2 rate for that year, which will save you money.
5. People who expect a benefit when they retire may find that their increased AOW is reclaimed in a reduced pension credit or rent allowance
6. Always check before handing over money. The rules are complicated and sometimes you can fill a gap that makes no difference to your final pension.
How much is the state pension?
The basic pension is currently £141.85 per week, or approximately £7,400 per annum. It is supplemented by additional AOW entitlements – S2P and Serps – if accrued during working years.
The two-tier government system was replaced in 2016 by a new ‘flat-rate’ state pension. This is currently worth £185.15 a week or about £9,600 a year.
Both amounts rise by 10.1 per cent in April – the old state pension to £156.20 and the new to £203.85.
People who have been outsourced to S2P and Serps over the years and retire after April 2016 will receive less than the full new state pension.
Employees had to have 30 years of National Insurance contributions to get the old state pension, but they now have to have paid 35 years of contributions to get the new flat-rate state pension.
But even if you’ve paid in full for 35 years, it could still be less if you outsource the contract for several years.
Everyone will have the option of deferring their state pension in order to receive more later.
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