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Should I make additional contributions to my State Pension?

A reader asks if the additional contributions would pay for themselves
Should I make additional contributions to my State Pension?

I am 58 and have taken early retirement after making 30 years of National Insurance (NI) contributions. What are the pros and cons of making a further five years of voluntary contributions so that I receive the full state pension in due course? RW

Gary Smith, chartered financial planner at Tilney Group, says: 

Boosting your State Pension can be an extremely efficient method of increasing the level of guaranteed income that you will receive in your retirement. Indeed, I am still surprised by how many people do not check their State Pension position ahead of their retirement or forget to include it altogether in their retirement planning.

Initially, I encourage those who are approaching their retirement to request a State Pension forecast which can be obtained online at www.gov.uk/check-state-pension.

You have made 30 years of NI contributions but this does not necessarily mean that you have 30 qualifying years for state pension purposes and obtaining a forecast will confirm this.

Since the new state pension was introduced on 6 April 2016, your NI record has been used to calculate your ‘starting amount’ which is the higher of:

  1. The amount of pension you would receive under the old State Pension rules, or
  2. The amount of pension you would get if the new State Pension had been in place at the start of your working life

However, the ‘starting amount’ included a deduction for any tax years in which you had been ‘contracted out’ of SERPS or State Second Pension through your private or employer pension schemes, prior to 5 April 2016. It is no longer possible to contract out.

Any qualifying years accrued since 6 April 2016 provide you with a full qualifying year towards the new state pension.

Assuming that you have no intention of returning to some form or employment, or aren’t in ill health or a carer, one way that you can boost your state pension is to make voluntary Class 3 NI contributions. You must be careful, however, as making voluntary contributions doesn’t always increase your state pension and, prior to making any payments, you should contact the Future Pensions Centre on 0800 731 0175. The cost of making class 3 Voluntary contributions is £15.85 or £824.20 for the 2022/23 tax-year and you can also make contributions for any gaps in your NI record during the previous six-year period.

Each additional year of State Pension purchased currently provides an extra pension of £5.29 per week or £275.08 a year. Looking at this another way, it effectively represents an annuity rate of 33.37 per cent, meaning the pay back period on your initial capital is only three years.

So, the advantages of buying additional qualifying years include:

  1. Being able to use them to make up any shortfall in your NI record to boost the state pension you receive from your state pension age, subject to the current maximum of £185.15.
  2. The cost of buying an additional year is repaid within three years of receiving the increased state pension.
  3. The State Pension currently benefits from the ‘triple lock’, meaning that it increases annually in line with the highest of increases in prices, average earnings, or 2.5 per cent. This is an extremely important benefit especially with the rising inflation we are currently experiencing.

However, there are a number of potential downsides to consider before making additional contributions, including:

  1. If you die before reaching state pension age you won’t benefit.
  2. Even if you purchase an additional year now, there are still seven or eight years until you start to receive your state pension.
  3. If you defer buying the years until closer to your State Pension age, the cost of buying the additional years could be higher than the current cost.
  4. You might not have available savings to cover the costs associated with buying additional years.
  5. Future changes to legislation could be implemented such as removing the ‘triple lock’ or changing the state pension age.
  6. You might already have sufficient guaranteed income to meet your retirement expenditure.

It is very often beneficial to make up any shortfalls in your NI record to boost your state pension, subject to the maximum available. However, I encourage you to request a state pension forecast to identify the level of shortfall and then speak to the relevant department to ascertain if you will benefit before making any contributions.