How to boost your most valuable source of retirement income

Although the state pension may not be your largest source of retirement income it is arguably the most important element. It will provide a guaranteed income for the rest of your life and benefits from a generous annual uplift. The 'triple lock' increases the level of the state pension each new tax year by the highest of 2.5 per cent, average increase in UK earnings or consumer price index (CPI) inflation in September the year before.

If you reached state pension age on or after 6 April 2016 you currently receive up to £185.15 a week or £9,627.80 a year. If you are a man born before 6 April 1951 or a woman born before 6 April 1953 and reached stage pension age before 6 April 2016, the basic state pension currently pays up to £141.85 a week or £7,376.20 a year, which in some cases is topped up with an additional state pension or extra amounts from your workplace pension.

If you have other pensions, sources of income and assets, the state pension might seem negligible. But they are unlikely to have such generous guaranteed annual uplifts and guarantee to pay out for the rest of your life.

For example, investments in defined contribution pensions such as self invested personal pensions (Sipps) and individual savings accounts (Isas) will increase or decrease depending on how markets perform. And not many people outside the public sector are entitled to defined benefit (DB) pensions which also guarantee to pay out a minimum level of income for life. And while these are also a valuable source of retirement income their annual increases are usually capped so, at most, rise 5 per cent a year.

The state pension, by contrast, will increase 10.1 per cent in April 2023 in line with CPI inflation in September 2022 taking the full new state pension from £185.15 to £203.85 a week.

This means that the state pension can go a good way towards providing a basic level of income to cover essential spending such as food and bills. For example, if you are a couple and both receive the full amount it equates to £19,255.60 a year rising to £21,200.40 from next April. You get that amount in full because it falls within the annual personal allowance for income tax of £12,570.

Increasing your entitlement

If you are not entitled to the full state pension it could be worth increasing your entitlement.

To qualify for the full new state pension you need 35 years' worth of National Insurance (NI) contributions or credits, and to get any pension at least 10 years' contributions or credits. To get the full basic state pension you need at least 30 years' NI contributions or credits. So you might have gaps in your NI record if, for example, you took time out to raise children or were unemployed.

Before looking into claiming or buying NI credits see what amount of state pension you are currently entitled to - especially as buying credits may not necessarily give you more state pension. "For instance, if you were contracted out of the state second pension at any point this will result in a lower state pension, but you would likely have received top ups to your workplace pension instead," says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

Before 2016, many workplace pensions used to contract people out of the second state pension. A state pension forecast will tell you if this was the case and show it as a ‘Contracted Out Pension Equivalent’ (COPE). This is the amount you would have received as an additional state pension if you had not contracted out so the COPE could reduce the amount of state pension you receive - even if you have 35 or more qualifying years of NI contributions.

If you are under state pension age you can check your entitlement at www.gov.uk/check-state-pension or contact the Future Pension Centre on 0800 731 0175. And if you are over state pension age, which is currently 66, you can contact the Pensions Service on 0800 731 0469 to confirm whether paying extra will provide an increased state pension.

If you have gaps in your record you may be eligible to receive credits to fill them in. You automatically are entitled to credits if you receive Child Benefit for a child under 12. "Parents who don't claim Child Benefit due to the High Income Child Benefit Charge can still claim credits by applying for Child Benefit but waiving payment of it,"  says Kay Ingram, chartered financial planner. "It's essential that the parent claiming is the one without NI contributions. If the wrong parent has claimed, they may transfer the credits to the other parent."

Family members, for example grandparents, who provide voluntary childcare for children under age 12 or 17, if the child is disabled, whose parents are working, can claim Specified Adult Childcare Credit. "If eligible, this can be backdated to 2011, providing credits worth over £2,906 of annual pension," says Ingram.

You are automatically entitled to credits if you receive Carer's Allowance because you are looking after an eligible adult. Carers who don’t qualify for Carer's Allowance may still claim Carer's Credits if they provide 20 hours or more care for an adult.

Being on statutory sick pay; statutory maternity, paternity or adoption pay; on jury service - unless you are self employed – and eligible for jobseeker’s allowance or employment and support allowance, but not claiming it can also qualify you to claim NI credits.

If you are not eligible to claim NI credits, you might be able to pay voluntary contributions. If you are self employed but don't earn at least £6,725 a year you do not pay compulsory NI contributions but can purchase class 2 voluntary contributions for £3.15 for a week or £163.80 for a year. Other people wanting to fill gaps in their contributions record can buy class 3 credits which cost £15.85 for a week or £824.20 for a year.

Each additional qualifying year works out to be an extra £5.29 a week or £275.08 a year in state pension, based on 2022/23 rates, according to the government-backed MoneyHelper website. So if you live 20 years after starting to receive the state pension the amount you get back could be over £5,000 for an initial cost of between £165 and £825.

If you buy class 3 contributions and live for two years and nine months beyond state pension age or pay class 2 contributions and live for seven months beyond state pension age voluntary contributions are good value, adds Ingram. The longer you live, the better value it becomes. "Those in their late 50s and early 60s, and in good health with contracting out history are the most likely to benefit from additional NI contributions or claiming credits to buy more pension," she adds.

At present, you can claim or buy credits to make up for NI shortfalls going back to 2006 but from 5 April next year you will only be able to fill in gaps for the past six tax years. So consider if it is worth filling in that shortfall ahead of the deadline. "Voluntary contributions for these earlier years made before April 2023 can be paid at the rate required in that year which is lower than the current year," says Ingram. "But consider whether you will pay NI or be eligible for credits in future years which will make up the shortfall before you reach state retirement age."

The cost of buying credits is also likely to rise so you will probably pay less for them now than in the future. "If you are likely to need to pay for more than six years think about doing that while you still can or face up to not receiving the maximum pension,” says Mark Frier, regional financial planning manager at MyRetirement.co.uk. If you "retire before having made sufficient NI contributions there is mileage in paying voluntary contributions."

Also see How deferring can bump up your state pension and Why you might be owed £8,900 in state pension money

When not to boost your pension

If you are some time away from reaching state pension age it may not be worth buying credits as you might make them up by that point via more NI contributions through work or by qualifying for free credits. "Consider whether you really will be best served by buying extra NI credits," says Morrissey. "If you are close to retirement this should be relatively easy to work out but if you are in your 40s, for instance, you have many years to potentially make up the necessary [contributions]."

If you die before state pension age you would not benefit from purchased credits or state pension.

Boosting your state pension entitlement might not be a good idea if it takes you into a higher tax band – especially if your total taxable income goes above £100,000 a year so that you lose some or all of your personal allowance for income tax.

If you receive Pensions Credit boosting your state pension entitlement could mean that you lose it so might not be better off. Pension Credit also gives entitlement to benefits such as optical and dental care, housing benefit and council tax reductions.

"If you really aren't going to need it or have a limited life expectancy, there are arguments not to pay voluntary contributions," says Frier. "But even then it depends on individual circumstances which is why it's beneficial to get financial advice."

For these reasons, you should check with the Future Pension Centre or Pension Service whether it's worth paying to top up your qualifying years.