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A £30,656 pension pot for £421

Created:

2 December 2008

Written by:

Moira O'Neill

Believe it or not, that's the deal on the table for some people with an incomplete national insurance contribution record. It represents a staggering return on investment of 7,200 per cent.

Here's how it works: Women with less than 10 qualifying years of national insurance are entitled to no basic state pension, but as soon as they reach the magic number of 10 qualifying years, they are entitled to a pension of 26 per cent of the full basic state pension (BSP). This year, the full BSP is £90.70 a week, meaning that 10 qualifying years would be needed to get a pension of £23.58 a week.

If a woman only has nine qualifying years, the cost of buying Class 3 National Insurance (NI) contributions to get an extra year (and qualify for 26 per cent of the full BSP) is only £421.20 (£8.10 a week). Yet, to buy an index-linked pension of £23.58 a week (or £1,226.26 a year) on the open market would cost £30,656.60 for a 65-year-old woman.

John Lawson, head of pensions policy at Standard Life says: "Women looking to take advantage of this deal should act fast. The government has cottoned on to the fact that Class 3 contributions are a give away and plans to raise prices." From April 2009 the Government will hike the cost of buying state pension years from £421 up to £627.

It will still be a good deal for those who need to bolster their basic state pension, typically women who have broken career histories owing to child-rearing, but it is an even better deal if you snap it up now. This year, you can buy up to 6 missed years at the current price.

People who are buying back tax year 2007-08 have until April 2010 to do so at the lower rate.

If you have not paid NI for the past 12 years and are due to reach state pension age in 2009, pensions analysts at Hargreaves Lansdown calculate you could pay £5,052 and get an extra annual income of £1,444 (women) or £1,286 (men). Based on average life expectancy this would mean an overall gain of £35,386 for women and £21,962 for men.

If you retire before April 2010, then buying a year gets you an extra £107 a year for life if you are a man and £120 if you are a woman. The difference comes from the fact that men need 44 years of NI contributions for a full basic state pension, women only need 39. When a man buys a year therefore he buys 1/44th of basic state pension while women buy 1/39th.

However, Laith Khalaf, pensions analyst at Hargreaves Lansdown says: "The deal is not suitable for everyone. In particular, younger people, married women and those who stand to fall into the means-testing trap may see no of little benefit from buying back extra years."

A state pension forecast can be obtained at www.thepensionservice.gov.uk or by calling 0845 3000 168.

Based on current rate of £421:

*Life expectancy of 21 years for males and 28 years for women, from GAD based on 65-year-old male and 60-year-old women (between 2010 and 2020 state pension age for women will rise from 60 to 65 years)

Source: Hargreaves Lansdown