Early retirement and NICs

[Degsy67]

I'm getting a little confused around early retirement, NI contributions and qualifying years for state pensions. I've been hopping around various websites to try to piece this together but a number of the sites don't reflect recent changes around Class 2 contributions. Hoping Fools here can help set us on the right path by checking and challenging the following logic.

My wife (49) recently gave up her full time teaching role. It is likely that she will be semi-retired over the next 5 years until we hopefully reach our FIRE target and I can then join her and we can both jack it in for a life of leisure! She may end up doing some ad hoc lesson cover work via a teaching agency for a few months per year over the next few years and maybe a little bit of exam marking.

She currently has 31 years of qualifying NICs. She left her job part way through TY17/18 but I think she'll get an additional qualifying year this year taking her to 32 years. She has a gap in her NI record for TY13/14 with a part qualifying year which we can complete by paying voluntary NICs of £135 which I intend doing over the next month or so. This will give her a total of 33 qualifying years out of the 35 she would need (current rules) to obtain a full state pension when she reaches age 67 in 2035, 17 years down the line - lots of time for various governments to mess about with state pensions and NIC rules!

Just trying to look at various scenarios based upon what we know now and to consider what we may need to do regarding voluntary NIC payments over the next few years.

If she earns enough in the subsequent tax years to generate additional qualifying years through ad hoc agency work then I guess we don't really need to worry too much. I understand that she will need to pay NICs on the equivalent of around £6k per year currently to achieve this. I've been hunting around for something definitive on the actual amount and how to calculate it from various government websites but I'm finding it difficult to track this down.

As her earnings each year for the next 5 years could be extremely variable, there's a possibility that she may generate full or part qualifying years. I understand that current rules allow gaps in her NIC record to be filled up to five years after the end of each tax year (which is what we are doing for her TY13/14 gap). Assuming this rule doesn't change, we could simply take a look at her NIC record in 5 years time and then contribute the minimum amount required to achieve the 35 qualifying years. Taking this route we don't have to worry too much about the recent removal of Class 2 NICs and potential voluntary payment of Class 3 NICs at £741 pa to buy an additional full year. We can simply look at the rules and her NI record in 5 years time and sort it out then. Obviously we'll keep a close eye on tax and state pension changes in the meantime.

If the above doesn't enable her to achieve 35 qualifying years over the next 5 years then we should sort this out at the point at which I cease full time employment through whatever route is available at the time (e.g., Class 3 contributions) rather than trying to complete her 35 year record in advance of this.

Does this approach sound reasonable? I realise that lots of things could change from a tax, NIC and state pension perspective over the next 5 years and it's difficult to second guess the best course of action. I'm assuming that any significant change will have some form of transitional arrangement therefore we will have to watch the situation closely.

Thoughts?

Degsy

[Lootman]

I don't claim to be an expert by any means, but my pension statement shows that my pension will be calculated based on the old scheme rather than the new scheme. This will happen because if you retire after April 2016, as in my case, then you get the better of the old and new computations.

If the old computation is higher than the new one, then only 30 years of NICs are needed, and so buying extra years would be a waste, aside from "contracted out" issues if relevant

[ursaminortaur]

I don't claim to be an expert by any means, but my pension statement shows that my pension will be calculated based on the old scheme rather than the new scheme. This will happen because if you retire after April 2016, as in my case, then you get the better of the old and new computations.

If the old computation is higher than the new one, then only 30 years of NICs are needed, and so buying extra years would be a waste, aside from "contracted out" issues if relevant

Probably best to get a statement

https://www.gov.uk/government/publicati ... -statement

Since your wife was a full time teacher was she in the teachers DB pension scheme ? Assuming she was then she would have been contracted out of SERPS/S2P. Hence under the old calculation her pension would probably be close to the old basic state pension even if she had a full old NIC record. Whereas under the new system calculation there would be a deduction because she was contracted out.
Hence it is best to get a statement - however I would expect that she will need to either earn additional years or buy additional years in the future to boost her state pension to the maximum level.

[Degsy67]

Yes, she was in the Teacher's DB scheme and therefore was contracted out for a period of time. We have the NIC record and have obtained an estimate of state pensions back in a March this year. This showed the position up to the end of TY15/16. The record for TY16/17 wasn't available at that time but it would add one full year of qualifying contributions.

Her state pension forecast from March says she can draw her state pension from her birthday in 2035 and is forecast at £155.65 per week (£8,121 pa) assuming that she contributes another 7 years before April 2035. It states that this is the maximum she will receive excluding any decision to defer.

I'll obtain another statement as it should be showing the position as at the end of TY 16/17 now.


Lootman - The above suggests that her state pension is being calculated on the new rules and 35 years of contributions. There is no reference to the old vs new calculation on her state pension forecast.

Ursaminotaur - Yes, she appears to be a couple of years short currently. The key question really is top up as we go to keep building a full NIC record year on year or defer this decision for 5 years and then look back and retrospectively fill the smallest gaps to achieve 35 years of NICs and maximise the state pension.


If we assume that a government of whatever persuasion is likely to tinker with the rules around NICs, state pensions and eligibility at some point over the next 17 years then I think what I'm trying to juggle / determine is the political equation around potentially impacting people who have already achieved their 30 or 35 years of contributions and then changing the rules of the game versus only changing the rules for people who haven't bagged their 30 or 35 years as yet.

Part of me is saying to bag the 35 years for my wife as soon as possible then politicians are less likely to take away her eligibility at some point down the line. The alternative is to run this risk for 5 years and then retrospectively fill any gaps in her record to minimise the amount of voluntary NICs we need to pay to achieve the same end.

Degsy

[ursaminortaur]

Yes, she was in the Teacher's DB scheme and therefore was contracted out for a period of time. We have the NIC record and have obtained an estimate of state pensions back in a March this year. This showed the position up to the end of TY15/16. The record for TY16/17 wasn't available at that time but it would add one full year of qualifying contributions.

Her state pension forecast from March says she can draw her state pension from her birthday in 2035 and is forecast at £155.65 per week (£8,121 pa) assuming that she contributes another 7 years before April 2035. It states that this is the maximum she will receive excluding any decision to defer.

I'll obtain another statement as it should be showing the position as at the end of TY 16/17 now.


Lootman - The above suggests that her state pension is being calculated on the new rules and 35 years of contributions. There is no reference to the old vs new calculation on her state pension forecast.

Ursaminotaur - Yes, she appears to be a couple of years short currently. The key question really is top up as we go to keep building a full NIC record year on year or defer this decision for 5 years and then look back and retrospectively fill the smallest gaps to achieve 35 years of NICs and maximise the state pension.


If we assume that a government of whatever persuasion is likely to tinker with the rules around NICs, state pensions and eligibility at some point over the next 17 years then I think what I'm trying to juggle / determine is the political equation around potentially impacting people who have already achieved their 30 or 35 years of contributions and then changing the rules of the game versus only changing the rules for people who haven't bagged their 30 or 35 years as yet.

Part of me is saying to bag the 35 years for my wife as soon as possible then politicians are less likely to take away her eligibility at some point down the line. The alternative is to run this risk for 5 years and then retrospectively fill any gaps in her record to minimise the amount of voluntary NICs we need to pay to achieve the same end.

Degsy

Even if your wife had had 35 years or more contributions on the old system when the system changed because she was contracted out for a large portion of that period she wouldn't have reached the maximum new pension level but just have currently got something close to the old basic pension eg maybe something like £115 or so and had to make further contributions to get the full amount. This is because under the old system she would just have got the basic state pension without much in the way of additional SERPS/S2P pension and under the new system she would have been penalised for having been contracted out.
The good news is that the Government recognised that a lot of people would be in that position and hence allows them to continue to buy (or accumulate through work additional pension) even if they have 35 years NIC contributions up until their normal retirement age. The bad news is that filling up gaps pre 2016 which is probably cheaper than buying voluntary NICs from now on probably won't help since it is the contracted out part which is hurting. The best bet is to just continue working for another 7 years or to buy 7 years of voluntary contributions in order to maximise the new state pension.
Another way of thinking of it though is that by making these additional contributions she will be better off than she would have been under the old system since in a sense she will be getting her basic state pension + Serps/S2P despite being contracted out (albeit at the cost of having to make the extra NIC contributions - but that will still be a good deal).

Unfortunately this simple flat rate system which the Government promised is anything but that for those retiring in the next 20 odd years.

[Lootman]

Lootman - The above suggests that her state pension is being calculated on the new rules and 35 years of contributions. There is no reference to the old vs new calculation on her state pension forecast.

The pensions statements don't show the old and new calculations side-by-side, annoyingly. They only give you a single number, which is the better of the two. So unless you know how the calculation works, it can be hard to know which version they used.

In my case it was easy as the cited pension is greater than the maximum on the new system (despite me having less than 30 years) so it must have been on the old calculation.

Now I see that your wife won't retire until 2035, I would imagine that you're right and it is the new computation that was used. And the contracted out thing is a big deal. They really shouldn't call it "flat" though, as it seems everyone gets a different amount. Rather it is capped, and so helps lower earners rather than higher earners. A friend of mine is going get over 200 a week next year when he retires, because of the earnings-related component - one third above the maximum anyone will get in the future.

[Degsy67]

I appreciate all of the comments provided to date however I don’t think I’ve framed my question correctly. The responses have focused down on the impact of SERPS and the reduction in the amount paid. This wasn’t really a concern. I understand and accept this. My focus is not on trying to get the maximum new flat rate state pension for my wife. I understand that this isn’t going to happen due to the period of time she was contracted out. My focus is more on the 35 year eligibility rule and how best to minimise the top up costs to achieve the maximum state pension possible, accepting the fact that there will be a SERPS related deduction.

There appear to be two basic routes to achieving the 35 qualifying years from where she is at. To make this simple, let’s assume that she currently has 32 qualifying full years and she will be working ad hoc over the next five years.

Option 1 - Top Up As You Go
At the end of each year we get an updated NI contribution statement, see how much NICs she has paid, how much top up is required (if any) to achieve a fully qualified year and paid this voluntary amount to bag a full year.

Option 2 - Retrospective Top Up
Work ad hoc for the next 5 years and at the end of this period get an updated NI contribution statement. See how many years she is short of the 35 qualifying years and make the minimu voluntary top up payments required to achieve the 35 qualifying years.

The benefits and risks of the two approaches are as follows. Option 1 achieves the 35 qualifying years as quickly as possible. If there are any negative changes to state pension rules the hope would be that the changes do not get applied to anyone who has already achieved 35 full years of contributions. The risk however is that you end up paying more in voluntary contributions, for example if the pattern of working in later years achieves the missing years without the need to pay voluntary contributions. With Option 2 you’re flipping this around. Running the risk of a legislative change for the benefit of minimising voluntary contribution payments.

Thoughts?

Degsy

[Chrysalis]

degsy, I think what posters have been trying to explain is that your focus on achieving 35 years is not really the point. Aiui your wife will continue to accrue entitlement up to the maximum flat rate pension - her accrual won’t stop when she gets to 35 years. I think from what you said above that what her statement is saying is that she’ll ‘top out’ at the max pension if she makes 7 more years contributions.
I’m in a similar position, 16 years from state pension age and with all my pre 2016 contributions contracted out. I think I’ll eventually hit maximum state pension if I stay in work long enough!
Can’t answer the question about cheapest way to contribute once she has stopped work, sorry.

[Degsy67]

degsy, I think what posters have been trying to explain is that your focus on achieving 35 years is not really the point. Aiui your wife will continue to accrue entitlement up to the maximum flat rate pension - her accrual won’t stop when she gets to 35 years. I think from what you said above that what her statement is saying is that she’ll ‘top out’ at the max pension if she makes 7 more years contributions.
I’m in a similar position, 16 years from state pension age and with all my pre 2016 contributions contracted out. I think I’ll eventually hit maximum state pension if I stay in work long enough!
Can’t answer the question about cheapest way to contribute once she has stopped work, sorry.

Surely she’ll only continue to accrue entitlement if she continues to work and continues to pay sufficient NICs to increasing her qualifying years? She has given up full time work now. Her earnings over the next 5+ years or so will be ad hoc or potentially non existent. If she doesn’t pay sufficient NICs then we will need to pay some kind of voluntary contribution to ensure that she is entitled to a full state pension minus the deduction relating to the fact that she was contracted out for a number of years.

Degsy

[Chrysalis]

Yes, I get that, but what I’m saying is that she can continue to accrue pension entitlement beyond 35 years until she reaches the flat rate maximum. Unless there is a different rule for years you buy by other methods than employment which caps them at 35 years. But I think you said she might be working enough to keep clocking up qualifying years?

[mearnsfool]

Lets stop getting tied up here in 35 years or SEPRS or Additional State Pension it matter not.

Lady Degsy has a very important piece of info that is all we need to work things out.

In 2016 Lady Degsy had £155.65 after seven more payments of NI.

The £155.65 per week is divided by 35 to show that her pension will increase at £4.45 plus inflation for each year of full NI contributions and that her state pension earned at April 2016 was £155.65 - (7 X 4.45) or £124.50.

This tells us that as the basic old style pension that those who retired prior to April 2016 received that year was £119.30 therefore she cannot increase her pension by buying years before April 2016 as she has £5 more than the basic state pension.

Now I believe she worked Apr 16 to April 17 if she earned over approx £5824 in that year that gives her another years NI contribution.
If she earned over £5,876 2017/2018 prior to stopping work she will receive another years NI contribution.

Therefore if she has earned an other two years contributions she only needs another 5 years contributions.

Lets keep it simple.

In March 2019 if she has not earned the Lower earnings limit of approx £6,000 from one single employer not from a mix of a few jobs on different payrolls she makes a £750 approx voluntary NI contribution.

In March 2020, 202, 2022 and 2023 she does the same check and if she has not hit the Lower earnings limit with a single employer she pays another £750 or so voluntary contribution for each year.

Job done!

[funduffer]

There appear to be two basic routes to achieving the 35 qualifying years from where she is at. To make this simple, let’s assume that she currently has 32 qualifying full years and she will be working ad hoc over the next five years.

Option 1 - Top Up As You Go
At the end of each year we get an updated NI contribution statement, see how much NICs she has paid, how much top up is required (if any) to achieve a fully qualified year and paid this voluntary amount to bag a full year.

Option 2 - Retrospective Top Up
Work ad hoc for the next 5 years and at the end of this period get an updated NI contribution statement. See how many years she is short of the 35 qualifying years and make the minimu voluntary top up payments required to achieve the 35 qualifying years.

The benefits and risks of the two approaches are as follows. Option 1 achieves the 35 qualifying years as quickly as possible. If there are any negative changes to state pension rules the hope would be that the changes do not get applied to anyone who has already achieved 35 full years of contributions. The risk however is that you end up paying more in voluntary contributions, for example if the pattern of working in later years achieves the missing years without the need to pay voluntary contributions. With Option 2 you’re flipping this around. Running the risk of a legislative change for the benefit of minimising voluntary contribution payments.

Thoughts?

Degsy

One other consideration is Mrs Degsy's health. Is there a chance that ill health may mean she does not reach retirement age (God forbid, of course)?

If this is the case, that would favour option 2, i.e. not topping up any NIC's until just before retirement age.

FD

[Lootman]

If this is the case, that would favour option 2, i.e. not topping up any NIC's until just before retirement age.

There is an argument to defer buying back years in any event, just on cashflow grounds.

When I got my NI contribution record, the back years I could buy were very helpfully listed by year, including the amount to pay and the last date when I could buy each year. So it is was quite simple to see when I should buy them i.e. just before I no longer can!

The purchase rate does go up each year, it seems. But not by a lot as far as I could tell.

[mearnsfool]

So there is no doubt here about being able to contribute more than 35 years Ni contributions which Degsy has thought may be the case.

The good lady had worked for the local council therefore had 10 years contracted out and a further 25 years contracted in.

In 2016 2017 she had earned approx £146.00 towards here state pension, £9.65 short of the £155.65 new state pension according to her state pension forecast.

She had 35 years of qualifying NI contributions at April 2016.

Therefore she could not top up her state pension from missed years prior to April 2016 as she was £27 above the old style state pension of £119. The old state pension only required 30 years contributions that she had been awarded.

Her 2016 2017 statement clearly stated that she would have to make a further 3 years contribution to reach £155.65 and it so happens she had 3 clear further years to work that's April to April prior to her state retirement age.

She would then have 38 years qualifying years at 5 April 2019 for a July 2019 state retirement age if she gets 3 further qualifying NI credits.

See Degsy thoughts about only paying for up to 35 years below.

::Option 2 - Retrospective Top Up
Work ad hoc for the next 5 years and at the end of this period get an updated NI contribution statement. See how many years she is short of the 35 qualifying years and make the minimu voluntary top up payments required to achieve the 35 qualifying years. ::::

[eventide]

I'm confused. Are there really circumstances where topping up voluntary NICs to fill gaps can't in fact increase your state pension due to previous contracted out years?

I've 21 years of full contributions
My forecast off the HMRC website is 159.55 with the latest cpi uplift assuming 35 years
But based on my NI record to April 2016 the running amount is presently only £86.18

I was contracted out for 10 years or so, in the 1990s-2000s, and the "COPE estimate" on HMRC website is £30.66. This seems to be an amount which forms part of a DB pension.

I have a quote to fill in 8 recent years to 2017 (for which there are no NICs so far) at varying rates from £689 to £733, and these prices are held until 2019. I'm ready to pay for the years (and 2017-future years to get to 35 total), but totally confused whether this will indeed increase what I will actually get due to the contracting out a long time ago.

[mearnsfool]

<I'm confused. >

Let’s try and sort this but your head will hurt to get any sense of this muddy system.

<Are there really circumstances where topping up voluntary NICs to fill gaps can't in fact increase your state pension>

You will notice I have cut the end of your sentence off to answer this as you are getting to many things into that question. Yes in certain circumstances the Department of Works and Pensions will let you purchase previous years and you will not get extra pension as the front line staff do not understand the system and there is a recent case where The Department of Works and Pensions were forced to refund these voluntary NIC’s but they did not do that without being forced to do it.

<Due to previous contracted out years?>

Being contracted out stops you getting additional monies on your pension based on your earnings it does not reduce the actual years of basic state pension you will get.

I am a bit confused with the numbers you quote.

Please advise the actual date of the pension forecast.
Please advise the actual years you have quotes to cover voluntary NI payments.
Did you get a full year NI in 2016 2017
Are you still working
What age are you.

Mods should this go to "Pensions Practical Problems" section

[mearnsfool]

I have re read your post and you appear not to have obtained NI full year credits since 2009 2010.

In this case as you have not reached pension age you are a special case and you can buy back years from 2006. Not the usual 6 years maximum.

The years to April 2016 will give you 1/30 x the old style state pension in 2017 that is £122.30 / 30, £3.98 per week per year of contributions.
The years from April 2016 will be at 1/35 of £159.55 (the new state pension) that equates to £4.56 per week per year of contributions from April 2016.

My calculations suggest that you need to purchase 7 years pre April 2016 NI contributions and 10 years post April 2016 NI contributions to obtain a full state pension of £159.55 at today's rate.

You already have 21 years NI contributions, plus my calculated 17 years of voluntary NI contributions, a total of 38 years. Therefore assuming you are approx 50 today and the state pension age is 67 then you would have time to do this. If you are over 50 it is getting tight time wise but by 2034 the retirement age may well be over 67.

With regards to contracting out there is no future damage to your state pension it has already been factored in as advised in your COPE value.

I realise this is not that easy to get your head round therefore ask if you want something clarified.

[mearnsfool]

Sorry I posted this too late at night. Eight of these years are in the future ,therefore you can do it approx if you are around 57 and by then the state pension retirement age may be more than 66.

[eventide]

mearnsfool many thanks for the replies, and I realise I’ve sort of hijacked the op’s thread, so I’ll post the on the pensions practical problems board as a new topic later today, armed with full information.

[Degsy67]

I appreciate all the input on this. My summary having read this thread again... it’s complicated!

Haven’t decided what to do yet. I’ll mull it over.

Degsy