If quiffs, Bakelite and daily deliveries by the milkman bring back nostalgic memories, you may want to review your National Insurance Contribution (NIC) record to ensure that you’re eligible for the State Pension. As a child of the 50s, you were more likely to have begun working in your teens, but it’s still not unusual to have gaps in your NIC record. You may have had a period when you were working abroad, were self-employed and on a low income, or were not working at all.

The first thing to do is to check your NIC record on the Government website. If you find that you have gaps, keep reading!

Understanding the Terminology

There are currently two State Pension systems. If you’re a man and were born before 6th April 1951 or a woman born before 6th April 1953, you’re eligible for the basic State Pension. If you were born on or after these dates, you’re eligible for the new State Pension. The earliest you can get either State Pension is when you reach State Pension age.

To get the full basic State Pension, you need a total of 30 qualifying years of NICs. If you have less than 30 qualifying years, your basic State Pension will be reduced.

To get the full new State Pension, you need 35 qualifying years. You’ll need a minimum of 10 qualifying years to get any new State Pension at all.

You may have National Insurance Credits that count towards your record, even if you didn’t make National Insurance payments for a particular year (these could be for unemployment, sickness or as a parent or carer, for example). You may also qualify if you’ve lived or worked abroad, or if you’ve paid married women’s or widow’s reduced rate contributions.

Can I make top up payments if I have gaps in my NIC record?

If you’re considering topping up your State Pension, the first thing to know is whether this is even possible.

Usually, you can pay voluntary contributions for any incomplete years within the last six years. The deadline is 5th April each year. This means that you have until the 5th April 2020 to make payments in respect of any missing NIC for the 2013/14 tax year onwards, for example.

If you’re a man born between 6th April 1945 and 5th April 1950 or a woman born between 6th April 1950 and 5th October 1952, you can also make top up payments in respect of earlier years for up to six years after you reach State Pension age.

Finally, if you’re a man born after 5th April 1951 or a woman born after 5th April 1953, you can make top up payments until 5th April 2023 towards any gaps in your record between April 2006 and April 2016.

When you check your NIC record, it should tell you whether you’re able to make top up payments and how much they will cost.

Top up payments are known as Class 3 contributions, or Class 2 contributions if you’re self-employed or living abroad.

Should I make top up payments?

Before deciding whether to make top up contributions, you should weigh up the cost, the benefit in terms of any increase in your pension as a result of the top up, and your personal circumstances including your age, health, income and other pension provision and assets.

What does it cost?

Top up payments made before 5th April 2023 in respect of gaps between 6th April 2006 and 5th April 2016 currently have to be paid at the rate of £15 per week (£780 per year). For gaps in 2017/18 payments the cost is £14.25 per week, and for 2018/19 the cost is £14.65 per week.

Is it worth it?

Each fully paid up, qualifying year of your NIC record represents 1/35th (around 2.85%) of your State Pension entitlement. This year (2019/20), the full State Pension is £168.60 per week and 1/35th of that is £4.81 (or just under £250 per year).

This means that if you pay for just one extra year at a cost of £780 (one off), you’ll gain £250 per year by way of State Pension for life! It will only take just over three years to recoup the amount spent on the top up. Potentially, that sounds like a very good deal!

However, before you dig out your cheque book and start writing, there are circumstances in which making a top up payment may not be beneficial…

You are likely to have a full NIC record

Most obviously, if you’re currently below State Pension age and likely to reach a full 35 years of qualifying NICs in future years, notwithstanding that you may have missed some years, then paying in a lump sum now will not result in an increase in your pension.

An average working life is around 40 years, so you could have 5 incomplete years and still be eligible for the full State Pension.

Deferring your State Pension

Delaying (deferring) the date that you start taking your State Pension can make a big difference to the level of pension you’ll get. The new State Pension rules provide for your pension to increase by 1% for every nine weeks you defer taking it, which works out as just under 5.8% per year.

For example, if you get £168.60 per week (the full new State Pension), by deferring for 52 weeks you’ll get an extra £9.74 per week (just under 5.8% of £168.60), or £506.48 per year.

You should consider whether this would be a more cost-effective way to increase your pension, rather than paying a lump sum top up.

Tax implications

You may still have to pay tax in retirement if your total income exceeds your personal allowance. Your total income includes anything received by way of State Pension, Additional State Pension, a private pension, earnings from employment or self-employment, any taxable benefits, and other income such as money from certain investments, property or savings.

Similarly, the reverse may be true. If you’re thinking about Inheritance Tax planning and how to minimise your taxable estate, a lump sum payment into your State Pension may be something to consider.

Your health

While you are highly unlikely to know your own life expectancy, you should take into account your health before making a decision. If, for example, you currently have only 4 qualifying NIC years, then the cost of increasing those to the minimum of 10 qualifying years would be a payment of £4,680.

That would qualify you for a pension of approximately £2,500 a year for life when you retire, which you wouldn’t have been entitled to otherwise. If you live for another 20 or 30 years, you might consider that money well spent!

Your other circumstances

A lump sum payment of thousands of pounds is not an insignificant amount of money, so it’s important to also consider your circumstances as a whole. Are you likely to need that money in the near future? Are there more suitable investment vehicles for that money?

Your State Pension forms an important part of your retirement planning and income, and we always recommend that you give it full and proper consideration. However, if you don’t already have full NICs, the options or topping up can be somewhat complex and need to be considered in line with your wider circumstances and financial plans.

If you’re unsure about what steps to take with your State Pension, get in touch today and speak with one of our Financial Planners. We can help you to put a holistic plan in place, taking into account your full financial picture, from your existing pensions and other investments to your legal and tax position and your wider financial goals.

This article is for information purposes only and does not constitute advice. Before making any decision, we recommend that you speak with a professional financial planner.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Colin Campbell

Associate Director, Wealth

With three young daughters, Colin appreciates first hand the importance of financial planning.

Learn more about Colin Campbell