Are voluntary NI contributions a no-brainer?

[Clariman]

Due to being partially contracted out and a period of part-time work, my other half's state pension is going to be about 20% short of the maximum. At first site, the voluntary contributions seem like a no-brainer. £741 for last year would give her £4.70 a week, which pays for itself after 3 years of pension. So I guess the gamble is that she lives more than 3 years after pension age.

Have I got that right?

Moderator Message:
Moved from Retirement Investing to Pensions Practical, leaving a link, to make Lemons there aware of this question. - Chris

[absolutezero]

Can't really comment on your individual case but the general consensus is paying voluntary NI to qualify for, or to top up, the state pension is a good idea.

I'm self-employed and semi-employed (don't - it's complicated) and the semi-employed job is one that has HMRC exemption from paying NI.
I pay the £2odd a week to maintain my entitlement to the state pension and it works out for me - should the pension age not rise to 113 before I get there.

[Eboli]

OP mentions contracted out and part-time work so Class 2 NICs may not be appropriate but the more expensive Class 3

See:

https://www.gov.uk/voluntary-national-i ... tributions

But as a payer of Class 3, I still see them as representing a good deal (though perhaps no the no-brainer of Class 2).

Eb.

[Nimrod103]

Have I got that right?

That is my interpretation, and on my advice, my wife has topped hers up. In her case most of her years have come by means of entitlement to child allowance*, but still fell short of the 35 years now required.

*One of the unintended consequences of withdrawing child benefit from higher rate taxpayers (even if its only because of the income of the father!), is that this women's entitlement is no longer automatic. Shiish!

[chas49]

Due to being partially contracted out and a period of part-time work, my other half's state pension is going to be about 20% short of the maximum. At first site, the voluntary contributions seem like a no-brainer. £741 for last year would give her £4.70 a week, which pays for itself after 3 years of pension. So I guess the gamble is that she lives more than 3 years after pension age.

Have I got that right?

My bold added. According to gov.uk, the rates of Class 2 and 3 NI for this year are:

Rates
The rates for the 2018 to 2019 tax year are:

£2.95 a week for Class 2
£14.65 a week for Class 3

If Mrs Clariman is not employed, and not claiming benefits, she would need to pay Class 3 (52*£14.65= £761.80). But if she registers as self-employed and declares an income of less than £1000 from (e.g.) eBay selling, she won't have to submit accounts, or pay any income tax on that(* subject to other income etc etc). She would then be liable to Class 2 NICs on a voluntary basis (52*2.95=£153.40)

See also viewtopic.php?f=49&t=11043, and viewtopic.php?f=17&p=165113#p165113

[PhaseThree]

I see two main risks in paying voluntary NI contributions. The first being longevity risk (You may be dead before you get to collect) and the second is political risk (Some government may decide to means test the state pension). To guard against this risk I intend to make contributions until I have 29 years on record then stop. You are allowed to back date 6 years of contributions, so a few months before my state retirement date I will make 6 years payments if it is still in my interest to do so at the time.

[absolutezero]

Due to being partially contracted out and a period of part-time work, my other half's state pension is going to be about 20% short of the maximum. At first site, the voluntary contributions seem like a no-brainer. £741 for last year would give her £4.70 a week, which pays for itself after 3 years of pension. So I guess the gamble is that she lives more than 3 years after pension age.

Have I got that right?

Look at it as a share with a (virtually) guaranteed payout at some point in the future - subject to tinkering by Governments.
Means testing? Maybe but the pensioner block vote seems to make the state pension untouchable.

£741 to buy £244.40 of annual income.
Dividend yield of 32.9% - almost guaranteed as far as the government is stable and not willing to touch pensioners.
Tories won't do it and Labour would shower you in other people's money,

P/E ratio of 3.
I'd buy that share as long as payment were guaranteed - which it is.

Yes. I know. No share has guaranteed anything but for this exercise, it does.

[BrummieDave]

Not forgetting that it's taxable income of course.

[Lootman]

I see two main risks in paying voluntary NI contributions. The first being longevity risk (You may be dead before you get to collect) and the second is political risk (Some government may decide to means test the state pension). To guard against this risk I intend to make contributions until I have 29 years on record then stop. You are allowed to back date 6 years of contributions, so a few months before my state retirement date I will make 6 years payments if it is still in my interest to do so at the time.

In any event it makes sense to make the voluntary contributions as late as possible, so that you have the use of those funds until you pay (and in case you drop dead of course).

The cost may go up from one year to the next, so it is worth keeping an eye on that. And the ability to contribute for prior years may be lost at some point. But otherwise I think it is best to wait as long as you can.

I maxxed out my own contributions just earlier this year, although I retired when I was 50. As a result I will get about 170 a week, which I consider is pretty good for someone who retired quite early.

As for political risk, that exists but is impossible to predict. But since the pension is taxed, and has been earned, it would be a bold move indeed for any government to try and means test it. The poll tax civil disobedience would be nothing on an army of revolting baby boomers . .

[mc2fool]

You are allowed to back date 6 years of contributions, so a few months before my state retirement date I will make 6 years payments if it is still in my interest to do so at the time.

Actually people yet to reach state pension age -- exceptionally and only until 5 April 2019 -- are allowed to back date them to 2006 (although it may not be worth doing so). The other point to note is that while, normally, you can back date 6 years of contributions their price is only frozen for 2 and goes up after that.

[JohnB]

I’m 50 with 29 years (surprisingly I got credits for ages 17 and 18 while still at school, so don’t assume it’s just based on work/child benefit). I’ve got a half year which is a no brainer to buy, but I’m not sure about getting more years now at £761, or waiting until SPA and paying more due to inflation and contribution level changes, but reducing political risk of means testing.

[monabri]

I decided that they were an absolute no brainer and am topping up...I've made 3 years of payments so far with another 5 to go...(I was contracted out). I've also done the same for Mrs Monabri. The payback is 3 years.

You can pay quarterly to HMRC or simply by writing a cheque for the full amount for the year you are buying.

I accompany the cheque with a short note saying what the cheque is for ( class 3 voluntary NI for year xxxx/yyyy, my full name,address and contact details and NI number ( also write the NI number on the front of the cheque).

A few months later you receive confirmation of the payment by post.

The increase in your pension might not immediately be reflected on your Government Gateway account but it does eventually catch up to reflect the extra NI payment.

I can't see it being means tested in my lifetime ( I'd be in the pensioners army storming No.10 ) and the obvious risk that one never sees the benefit.....

[monabri]

Just a note

Check this... only buy new years from 2016/17 onwards...do NOT buy missing years of NI contributions from before tax year 16/17.

[pochisoldi]

Just a note

Check this... only buy new years from 2016/17 onwards...do NOT buy missing years of NI contributions from before tax year 16/17.

Why?

Hint: Recommendation + justification makes for a more valuable post...

[ursaminortaur]

Just a note

Check this... only buy new years from 2016/17 onwards...do NOT buy missing years of NI contributions from before tax year 16/17.

Why?

Hint: Recommendation + justification makes for a more valuable post...

When the new system began in 2016 a starting amount was calculated which was the maximum under the new system or under the old system of old state pension + Serps/S2P. If the calculation which maximised your starting amount was done on the old system then filling in contributions before 2016 are probably pointless since they would at most boost the old state pension element (which only required 30 years of NI contributions anyway rather than the 35 required for the new system). Hence If you already had 30 years of NI contributions and your starting amount was calculated under the old system but was less than the full new pension amount then making extra pre-2016 contributions won't increase your starting amount and hence won't increase your final state pension.
Unfortunately the government pension forecasts no longer show the two figures that were calculated to decide the 2016 starting amount so it can be difficult to work out whether the actual starting amount was based on the new or old system. However post-2016 NI contributions will boost the final pension up towards the maximum.

https://www.thisismoney.co.uk/money/pensions/article-5600541/Officials-admit-say-state-pension-work.html

The confusion around the scheme has come from the arrival of the single-tier state pension, now worth £164.35 a week, in 2016.
To qualify for this amount, savers need 35 years of full NI contributions. They only required 30 to get the full basic £125.95-a-week pension under the old scheme.
If the Government works out you would have been better off on the old scheme, and you had 30 years of NI contributions by April 2016, attempts to boost your pension may be futile.
The Future Pension Centre can identify savers with missing NI years, but can't say if they will benefit by buying more.

[absolutezero]

A few months later you receive confirmation of the payment by post.

[mc2fool]

Just a note
Check this... only buy new years from 2016/17 onwards...do NOT buy missing years of NI contributions from before tax year 16/17.

Why?
Hint: Recommendation + justification makes for a more valuable post...

When the new system began in 2016 a starting amount was calculated which was the maximum under the new system or under the old system of old state pension + Serps/S2P. If the calculation which maximised your starting amount was done on the old system then filling in contributions before 2016 are probably pointless since they would at most boost the old state pension element (which only required 30 years of NI contributions anyway rather than the 35 required for the new system). Hence If you already had 30 years of NI contributions and your starting amount was calculated under the old system but was less than the full new pension amount then making extra pre-2016 contributions won't increase your starting amount and hence won't increase your final state pension.

While that's all correct, just an FYI on the use of the past tense in the above in case anyone might incorrectly form the impression that this all was done in 2016 and was "fixed" then and that's it...

The "starting amount" calculation will actually be done when you reach state pension age (and is also done for estimates beforehand). It's at that point that your contributions for years up to 5-Apr-16 will be calculated under the new system and old systems and the "starting amount" going forward from there determined.

The blanket unequivocal warning to only buy new years from 2016/17 onwards and not any missing years before then is not correct. Whether it's advantageous to buy any NICs, before or after 2016, is entirely dependent on each individual's situation.

I wrote up how the calculations under the old and new systems, and the "starting amount" at April 2016, work on TMF which folks may find useful. The numbers have changed since, and COD+RDA for the new system is now called the COPE, oh, and where it says "current" state pension it, of course, would now read "old" -- but otherwise the explanation is still good . It's archived at http://web.archive.org/web/201701120049 ... 01655.aspx

And there's been quite a lot of discussion here already on the matter. I suggest folks search this board for COPE and/or NIC.

Folks looking into this for themselves should get an online state pension forecast and also a written one (see https://www.gov.uk/check-state-pension for both). While it is the case that these no longer show how the "starting amount" is calculated, most people will be able to work it out from the figures they do give, and if not then once you've received a written forecast you can then call them to ask them to give you the breakdown (see the archived post linked to above for the terminology to use).

[vrdiver]

I wrote up how the calculations under the old and new systems, and the "starting amount" at April 2016, work on TMF which folks may find useful. The numbers have changed since, and COD+RDA for the new system is now called the COPE, oh, and where it says "current" state pension it, of course, would now read "old" -- but otherwise the explanation is still good . It's archived at http://boards.fool.co.uk/firstly-as-a-m ... 01655.aspx

I followed your link, but sadly it says "can't be reached". Any chance of reposting?

VRD

[mc2fool]

I followed your link, but sadly it says "can't be reached". Any chance of reposting?

Oops, sorry, I posted the original TMF address rather than the archive URL! Being within the editing window I've corrected it in my post, and here it is too: http://web.archive.org/web/201701120049 ... 01655.aspx

[Lootman]

You can pay quarterly to HMRC or simply by writing a cheque for the full amount for the year you are buying.

I accompany the cheque with a short note saying what the cheque is for ( class 3 voluntary NI for year xxxx/yyyy, my full name,address and contact details and NI number ( also write the NI number on the front of the cheque).

A few months later you receive confirmation of the payment by post.

There is actually a form you can get for paying backdated years. When I asked for my record of NI contributions it was automatically sent to me, along with each year I could back pay, and the cost of each one.

I felt that was an easier and more reliable way to do it than computing it myself, sending a cheque and accompanying it with a letter.

The new numbers showed up after a few months.