The post that provides a guide to paying voluntary National Insurance Contributions (NICs) – and considers what factors you should consider in deciding whether to do it (especially for would-be early retirees).
I recently mentioned to some colleagues that I’d paid about £850 in voluntary National Insurance Contributions (NICs) in order to “fill in” previous years of incomplete contributions.
They were surprisingly interested and wanted more guidance on how they could do it and whether they should. All the while me carefully pointing out I wasn’t a regulated Independent Financial Advisor, of course. It made me think others might be interested in this. So I thought I’d do a post on it, even though the topic won’t interest everyone.
What are Voluntary NICs
Voluntary NICs are what are known as “Class 3” contributions. This post is not talking about voluntary Class 2 NICs for certain categories of self-employed persons. You can pay them to fill in gaps in your National Insurance Contribution record. You may have gaps for years where, for example, you didn’t earn enough, were unemployed and not claiming benefits or were a student.
I should point out that I am subject to the new state pension regime. The regime applies to men born on or after 6 April 1951 and women born on or after 6 April 1953. However, because I have qualifying NICs years from before April 2016, the state pension I get is some complicated hybrid between the old and the new rules. You can read about how it’s calculated on the government website here.
But for now I just want to caveat everything I’m about to say with the warning that depending on your age and number of qualifying NICs years, different considerations may apply to you. Therefore it is important to speak to the Future Pension Centre (see Step 3 below) who will talk through your individual circumstances.
NI/New State Pension: the basics
Under the new State Pension Rules you need 35 years of qualifying NICs to get the full state pension.
As a general rule, as long as you have at least 10 qualifying NICs years you will get some State Pension.
As the rules currently stand, each qualifying year of contributions adds an extra £4.70 per week to your State Pension.
Is there a deadline to pay?
The usual rule is that you can pay voluntary NICs for the past six years. However, if the new state pension applies to you, you have until 5 April 2023 to pay voluntary contributions to make up for gaps between April 2006 and April 2016.
The rest of this post is divided into the “how” and the “why” of paying Class 3 voluntary NICs.
STEP-BY-STEP GUIDE TO PAYING VOLUNTARY NICS
Step 1: Get a Government Gateway log in
First you’ll need to check your NI record via the Government Gateway.
Step 2: Check your NI record
Once you have a Government Gateway account, you can check your NI record. It’s very self-explanatory and looks something like this:
Mine showed me I have 5 years where I did not contribute enough for it to be a full, qualifying year. One of these was too far back for me to be able to fill it in. Of the other 4, the Government Gateway told me the cost of filling in the gaps was as follows:
2012-2013: c. £25
2013-2014: c. £700
I have to say, the logic behind these figures made no sense to me. I just decided to go with the flow and accept the numbers.
Step 3: Call the Future Pension Centre
It is now impossible to pay voluntary NICs before you’ve spoken to the Future Pension Centre on 0800 731 0175. Ring them up and they’ll make an appointment for you to speak to an advisor. There can be a bit of a wait for this.
I assume the reason you must now speak to the FPC is because the Government has come under fire in the past for allowing people to pay voluntary NICs when the additional years made no difference to their State Pension. I believe this happened if they had already accrued greater pension benefits than the new State Pension prior to 6 April 2016.
The advisor at the FPC will be able to crunch the numbers with you to help you decide if (and how much) to pay.
If you’re quite young, the FPC people will try and dismiss your request to pay voluntary NICs on the basis you’ve got loads of remaining years to get to your full 35 years of contributions. I had to be quite firm that I was planning to retire early and didn’t think I’d quite make it to 35 years,
Step 4: Pay the voluntary NICs
The FPC advisor will give you the generic HMRC number to call in order to get a reference number to pay the NICs. After a long time on hold you will get to speak to someone who will once again query why you want to pay. Explain to them you have run through the numbers with the FPC and they will give you your reference number and arrange payment with you.
The Government website says you can pay via direct debit. The advisor I spoke to on the phone said this wasn’t possible. As I was fine with paying in one lump I didn’t interrogate it too much, but I’m pretty sure you can pay in instalments at least. I chose to pay by bank transfer but was also given the option to pay by cheque.
Step 5: Keep checking your record at the Government Gateway
I got a bit nervous as my payment wasn’t showing up on my Government Gateway record. After about 3 weeks I rang HMRC on their general enquiry line (0300 200 3500) and they were able to confirm they had received the payment. The advisor then applied the money to my account. I’m sure it would have showed up on my account eventually without my intervention. But if like me you’re anxious about where your money’s going, you may want to give them a nudge.
SHOULD YOU PAY VOLUNTARY NICS?
So, we’ve looked at how you can pay voluntary NICs, but the question remains: should you? This is an especially difficult question to answer if you are some way off of retirement. For those of us who are looking to retire early, it is tempting to fill in as many years as we can.
On the other hand, a lot of us with early retirement plans, plan on the basis that we won’t be getting a State Pension anyway, as it is too uncertain.
My “future fund” goals are based on excluding the State Pension. But that doesn’t mean I didn’t want to look into making voluntary payments if the numbers made sense.
These are the questions I think you need to ask yourself:
Is there any benefit at all in paying voluntary NICs?
How many years short of the full state pension will I be?
If paying is potentially beneficial, do the numbers actually stack up?
How much can I handle risking?
Let’s go through these in turn.
1.Is there any benefit at all in paying voluntary NICs?
This one is really aimed at those people that have already reached the maximum contributions and further contributions add nothing to your State Pension. The FPC can advise you of this.
2. How many years short of the full state pension will I be?
For would-be early retirees this might involve a bit of crystal-ball gazing as to how many more years you’ll work.
Take my situation for example. Before making my voluntary contributions I had 11 qualifying years. I needed another 24 years, which takes me to age 55. If you look at my retirement goals, my final retirement goal is to retire at 54 (so one year short).
This meant that paying that £25 to fill in 2012-2013 was a no brainer. But what about the other years? I’m hoping that my goal numbers are over cautious and I can retire before 54. (Update: my goal has been brought forward to 52). My figures are also based on a relatively “luxurious” retirement and I may choose to retire earlier on less money. That’s where question 4 comes in.
3. If paying is potentially beneficial, do the numbers stack up?
What this means is, how long do I need to live after I start drawing the State Pension to make back what I’ve paid in voluntary contributions? The FPC will help you do the maths.
I mention above that (at current rates) every qualifying year gives you £4.70 a week extra in State Pension. So for my £25 top-up year, I only need to live about 5 weeks after State Pension age to start profiting from that. If I paid all four of the gap years it would benefit me after just under 3 years.
Given current life expectancy, even with an inevitable increase in when you can claim the State Pension, it would probably turn out to be profitable to make all of the payments. However, there are a number of risks to this…
4. How much can I handle risking?
Whatever you pay in NICs (whether voluntary or otherwise) the further you are from retirement the greater the risk that whatever you pay out will prove to be wasted. This could be for several reasons:
a) You die before State Pension age (bleak!)
b) The Government changes the pension rules.
c) You end up working longer than expected and make it to the full 35 years of contributions anyway, without the need for the voluntary ones.
As to a), unless you sadly have a reason to think you have a short life expectancy, I think it is best to go with statistical averages and assume you’ll make it to State Pension age.
As to b), this is entirely possible and arguably inevitable. It is why so many people pursuing early retirement don’t factor the State Pension in to their calculations.
are we all screwed in retirement?
Some think it will become means-tested and others think it could be abolished entirely, given what a ticking time bomb it all is (honestly all articles on it terrify me!). However, my own view is that either of these would be political suicide.
Is a Government going to be bold enough to tell the very people that have probably contributed the most in NICs that they are not getting anything to show for it? Granted if the “bomb” explodes maybe the Government of the day will have no choice.
Personally I think it more likely that the State Pension age will keep getting pushed back and back so the years of people claiming is more in line with what was envisaged when the State Pension was first introduced.
Not the unwieldly, unmanageable disaster it is now. But in that case, it’s likely the number of required qualifying years will go up and it would have been even more beneficial to pay those contributions.
For me, c) is the main concern. Ultimately, the question I asked myself to get over this hurdle was this:
“Is this a shruggable amount?”
What I mean by that is: if I pay these contributions and in the future it turns out to have not been worthwhile, what is an amount that I can shrug my shoulders and say “it was worth the risk”?
For me, that meant paying off the three cheapest years (at a cost of £848) but not the c. £700 payment for 2013-2014.
So that was my thought process in terms of deciding what to pay. As I said to my colleagues, I’m not an IFA and their situation might be different. So speak to the FPC and ask yourself the questions above before making a decision.