Maximising State Pension

[Wizard]

I have read John B's thread with interest and it has given me a kick up the backside to look at my and my wife's situation. Having read the thread John B started and the linked topics I have learned a lot, but was hoping I could test my understanding here.

***Mods, I am happy for this to be merged in to John B's thread, but did not want to post there myself in case he thought I was hijacking it***

Mr Wizard
My online forecast tells me that my forecast State pension based on my current record is £124.22 pw, this is based on 21 years of full contribution. It says if I make 9 more years of contribution I will receive the maximum amount of £164.35 pw. As, to get the maximum amount, I am being told I need 30 qualifying years I appear to be best placed to maximise my pension under the old scheme.

I have spent the last 10 years working for myself and drawing an income from my own company through dividends and have not contributed in these years. I have 15 years left until retirement. On the face of it my situation seems quite simple. If I switch part of my remuneration from my company to salary rather than all from dividends, as long as I do that for at least 9 of the next 15 years I will be entitled to a maximum state pension.

Mrs Wizard
My wife's online forecast tells her that her State pension based on her current record is £151.85, this is based on 29 years of full contribution. It says that if she makes another 3 years of contribution she will receive the maximum amount of £164.35. This seems a little odd as that adds up to 32 years of contribution to get the full pension, not 30 or 35. She currently is registered as receiving child benefit for our two children, one of whom is only 13, so she will be receiving that for at least another 3 years*. On that basis it seems we need do nothing and she will in three years time end up with a full pension entitlement.

* I do have a couple of rental properties and the changes in how these are taxed mean my taxable income could in the next three years go above the £50k threshold for reduced child benefit. If this means my wife would not get the NI credit for those years, as she is the Company Secretary for our company and does a lot of administrative work the company could also pay her a salary for the three years necessary to get the full pension.

So on the face of it our situation seems pretty simple, with the following actions:
i) switch sufficient of my income to a salary to get credit for at least nine of the next 15 years;
ii) only if my income goes above £50k in the next three years, pay my wife sufficient salary to get credit for at least 3 years
So no requirement for either of us to buy previous years to fill any gaps.

Can it be that simple?

[DrBunsenHoneydew]

One thing - if your wife is not working or earns below the NI threshold for income, she won't get the child benefit NI credits for her pension if the child is over 12.

[Wizard]

One thing - if your wife is not working or earns below the NI threshold for income, she won't get the child benefit NI credits for her pension if the child is over 12.

Ah, I did not know that, our children are 15 and 13, so I guess it is 'plan B', i.e. start paying her a salary and do so for at least three years. Many thanks for that.

[mc2fool]

My online forecast tells me that my forecast State pension based on my current record is £124.22 pw, this is based on 21 years of full contribution. It says if I make 9 more years of contribution I will receive the maximum amount of £164.35 pw. As, to get the maximum amount, I am being told I need 30 qualifying years I appear to be best placed to maximise my pension under the old scheme.

I have spent the last 10 years working for myself and drawing an income from my own company through dividends and have not contributed in these years. I have 15 years left until retirement. On the face of it my situation seems quite simple. If I switch part of my remuneration from my company to salary rather than all from dividends, as long as I do that for at least 9 of the next 15 years I will be entitled to a maximum state pension.

Or you can make up 9 years with pre-2016 voluntary NICs leaving only one year to make up post then, which may (or may not) be cheaper.

The current (2018/19) old basic state pension is £125.95 and the new one £164.35. Assuming you have a COPE of 0 (check your online statement), your "starting amount" at 5-Apr-2016 will be the higher of (using current figures) of, new: £164.35 * 21 / 35 = £98.61, and old, £125.95 * 21 / 30 = £88.17 plus Additional State Pension. As they're quoting you £124.22 then clearly you have an ASP of £36.05.

Now, you could get post-2016 years (either by voluntary NICs or as you state) and each one would get you ~£4.70 extra, so you'd need (164.35-124.22)/4.7 = 8.5 years, i.e. 9 years. Or you could get 9 pre-2016 ones changing your starting amount to (£125.95 * 30 / 30) + £36.05 = £162.00 and then just get one more post 2016 to get you up to the full £164.35. I'll leave you to figure out which will be cheaper for you

My wife's online forecast tells her that her State pension based on her current record is £151.85, this is based on 29 years of full contribution. It says that if she makes another 3 years of contribution she will receive the maximum amount of £164.35. This seems a little odd as that adds up to 32 years of contribution to get the full pension, not 30 or 35.

Not at all odd: she clearly has some Additional State Pension. If all of her 29 years is pre-2016 then it's £151.85 - (£125.95 * 29 / 30) = £31.02. If 27 are pre-2016 and the other 2 post then it's £151.85 - ((£125.95 * 27 / 30) + (£164.35 * 2 / 35)) = £29.10.

[JohnB]

Watch out for co-incidences in ratios. My forecast was 30.0082/35 of the fully paid forecast, when I had 29 years. So I assumed there was a year discrepancy. As it turned out the number was derived a completely different way.

[Wizard]

My online forecast tells me that my forecast State pension based on my current record is £124.22 pw, this is based on 21 years of full contribution. It says if I make 9 more years of contribution I will receive the maximum amount of £164.35 pw. As, to get the maximum amount, I am being told I need 30 qualifying years I appear to be best placed to maximise my pension under the old scheme.

I have spent the last 10 years working for myself and drawing an income from my own company through dividends and have not contributed in these years. I have 15 years left until retirement. On the face of it my situation seems quite simple. If I switch part of my remuneration from my company to salary rather than all from dividends, as long as I do that for at least 9 of the next 15 years I will be entitled to a maximum state pension.

Or you can make up 9 years with pre-2016 voluntary NICs leaving only one year to make up post then, which may (or may not) be cheaper.

The current (2018/19) old basic state pension is £125.95 and the new one £164.35. Assuming you have a COPE of 0 (check your online statement), your "starting amount" at 5-Apr-2016 will be the higher of (using current figures) of, new: £164.35 * 21 / 35 = £98.61, and old, £125.95 * 21 / 30 = £88.17 plus Additional State Pension. As they're quoting you £124.22 then clearly you have an ASP of £36.05.

Now, you could get post-2016 years (either by voluntary NICs or as you state) and each one would get you ~£4.70 extra, so you'd need (164.35-124.22)/4.7 = 8.5 years, i.e. 9 years. Or you could get 9 pre-2016 ones changing your starting amount to (£125.95 * 30 / 30) + £36.05 = £162.00 and then just get one more post 2016 to get you up to the full £164.35. I'll leave you to figure out which will be cheaper for you

My wife's online forecast tells her that her State pension based on her current record is £151.85, this is based on 29 years of full contribution. It says that if she makes another 3 years of contribution she will receive the maximum amount of £164.35. This seems a little odd as that adds up to 32 years of contribution to get the full pension, not 30 or 35.

Not at all odd: she clearly has some Additional State Pension. If all of her 29 years is pre-2016 then it's £151.85 - (£125.95 * 29 / 30) = £31.02. If 27 are pre-2016 and the other 2 post then it's £151.85 - ((£125.95 * 27 / 30) + (£164.35 * 2 / 35)) = £29.10.

Many thanks for your helpful response mc2fool.

As it happens my COPE is not 0, on the HMRC site it informs me that it is £12.88. Based on some of your previous posts if I understand correctly the calculations for the starting point are as follows:

Old: BSP + TASP - COD + GRB, (but now COPE is used instead of COD and I did not work pre 1975, so GRB is not relevant)
So that gives me £125.95 * 21/30 = £88.17 + ASP - £12.88 = £124.22, therefore ASP must be £48.93.

New: SSP - COD - RDA, (but now COPE is used instead of COD and RDA)
So that gives me £164.35 * 21/35 = £98.61 - 12.88 = £85.73

Is that right? And indeed, even if it is not, it does not seem to have any impact on my 'go forward' strategy?

In terms of extra years, as you can say I need to do some calculations to see which is the best way to buy previous years. Having done a little more reading today it does look like I can effectively get the additional years for free if the company pays me a salary that falls between the Lower Earnings Limit (£116 pw) and the Primary Threshold (£162 pw) no NI will actually be payable by either myself or the company, but I will receive full credit for the year for state pension purposes. But I need to consult my moral compass on that one as initially I do not feel comfortable with it.

[pochisoldi]

But I need to consult my moral compass on that one as initially I do not feel comfortable with it.

Your company has been paying corporation tax on its profits - money in the pot.
Your company may have been:
Providing goods/services which allowed other people to make money (and pay tax - more money in the pot)
Providing goods/service on which your customers paid VAT (some more money in the pot)
Employing other people (who pay income tax, and use the money you pay them to buy goods and services which are taxed - in the pot)

This is all before you started paying yourself a wage/took dividends.

You've been putting money into the larger pot of society, and shouldn't have any qualms about taking anything out.

PochiSoldi

[vrdiver]

I need to consult my moral compass on that one as initially I do not feel comfortable with it.

+1 to what pochisoldi has said.

You have identified a legal tax avoidance use-case. You don't make the rules, but do have to live by them, and in this case the rules appear to be in your favour.

When consulting your moral compass, by all means consider whether this is "fair", but also consider whether you have paid "more than" your fair share of tax bearing in mind the risks you also take with your style of employment. If, ultimately, you feel you owe society in return for these extra pension benefits, by all means make redress, but consider which bits of society could most do with your money, which may not be HMRC!

Also bear in mind that HMRC will keep the money should you or Mrs W. pop your cloggs, unlike most other pension providers during the accumulation phase, nor do they offer any sort of minimum payout period once you retire, so whilst it's a good investment for those who survive, it's not quite as attractive when viewed from the deceased's estate...

Just saying, before you get all dewy-eyed at the generosity of our government's largesse.

VRD

[mc2fool]

As it happens my COPE is not 0, on the HMRC site it informs me that it is £12.88. Based on some of your previous posts if I understand correctly the calculations for the starting point are as follows:

Old: BSP + TASP - COD + GRB, (but now COPE is used instead of COD and I did not work pre 1975, so GRB is not relevant)
So that gives me £125.95 * 21/30 = £88.17 + ASP - £12.88 = £124.22, therefore ASP must be £48.93.

No, that would be the TASP

The (unqualified) term Additional State Pension (ASP) most usually refers to the NetASP, i.e. TotalASP - COD, being what you actually receive, and that's how I was using it.

However, note that from just the figures above you can't determine the TASP 'cos, as you note below, COPE is COD + RDA, but only COD is used in the ASP calculation. Your figure of £48.93 for the TASP would only be correct if your RDA is zero, i.e. you are sure you were never contracted out from 1997 onward. Otherwise you can only determine (TASP - COD) from the figures, not what TASP and COD are themselves.

New: SSP - COD - RDA, (but now COPE is used instead of COD and RDA)
So that gives me £164.35 * 21/35 = £98.61 - 12.88 = £85.73

Is that right? And indeed, even if it is not, it does not seem to have any impact on my 'go forward' strategy?

That is right, and, yes, it doesn't change anything going forward.

[mearnsfool]

Wizard.

I'm going to kick you up the backside.

You should have paid yourself around £8,000 a year or so for the past 10 years or so (the primary threshold) and if you had asked HMRC they would agree with that and for 8 out of those 10 tax years up to April 2016 you would have received 8 x £2.00 per week in second state pension for each of those years around £16 per week on to your pension and also 10 years state pension on both the new and old rates plus inflation around a further say £45 a week on your state pension.

To be honest you have been badly advised on your actions to date as a lot of limited company directors have been by their accountants. A friend of mine had similar bad advice and he has lost in the region of £40 a week on both his and his wifes state pension, which has been in payment for a year.

He considered he had been smart not to register for PAYE and take his company income as dividends as he did not have to pay his non existant NI contributions. I did not explain the loss to him when he retired as what he does not know, he does not miss but he is less than well off.