A Short Guide to State Pension Top-Ups

But what if you have gaps in your State Pension record? Is it worth topping up your State Pension, or could the money be put to better use elsewhere?

How Does the State Pension Work?
First of all, it’s worth understanding what the State Pension will give you:

• The new State Pension (available to anyone reaching State Pension age after 2016) provides an income of £179.60 per week (£9,339.20 per year).
• This amount increases every year, either in line with inflation (as measured by the Consumer Prices Index), or 2.5%, whichever is higher. While this ‘triple-lock’ is controversial, and may not always apply, it is likely that State Pensions will keep some form of inflationary protection.
• The State Pension age is currently 66. This will increase to 67 between 2026 and 2028, and potentially to 68 and beyond in the years that follow, depending on increases to life expectancy.
• You have to claim your State Pension, it will not be paid automatically. You should receive a letter explaining the amount due, when it is payable, and how to claim it.
• You can defer your State Pension if you wish, although this is less common now, as most people consider State Pension age the very latest point at which they are likely to retire. Your State Pension will increase by 1% for every 9 weeks it is deferred (equivalent to 5.8% per year).
• If you die, your State Pension will stop. However, your spouse or civil partner may be able to claim an increase to their own State Pension.

How Do You Build Up a State Pension?
You can build up a State Pension in the following circumstances:

• By paying National Insurance through your salary or business earnings. This applies on earnings above the primary threshold (£9,568 per year).
• By receiving National Insurance credits if you are low earner. If you earn between £6,240 and the primary threshold, you will build up a State Pension without actually paying National Insurance contributions.
• By claiming child benefit.
• You are unemployed and looking for work.
• You receive Universal Credit.
• You are a full-time carer.
• You receive, or are eligible for, Employment and Support Allowance.
• You are on maternity, paternity, or adoption leave.
• You are the spouse or civil partner of a member of the armed forces, and living overseas.
• You were wrongly imprisoned.

You may need to claim National Insurance credits, as they are not always accrued automatically.

You cannot build up National Insurance credits if:

• You are in full-time education.
• You are earning below the lower earnings limit (£6,240 per year).
• You are living abroad (although you may be able to build up credits to the equivalent scheme in your country of residence).
• You are in prison.
• You are not working and none of the above situations apply (for example, a stay-at-home parent of adult children would no longer be eligible for child benefit, and therefore would not qualify for National Insurance credits).

You need 35 years’ worth of National Insurance credits to achieve a full State Pension. If there are any gaps in your record, you will receive a proportional amount.

You can request a State Pension forecast at Check your State Pension forecast - GOV.UK (www.gov.uk).

Filling in the Gaps
If you have a shortfall in your record, you may be able to top this up by making voluntary, or Class 3 National Insurance contributions.

You can top up your record for up to six years after the tax year in which the gap occurs. This means it’s worth checking your record sooner rather than later, as you won’t always have the option to recover the missed credits.
You can check for gaps, and confirm your eligibility for Class 3 contributions at Check your National Insurance record - GOV.UK (www.gov.uk).

Are State Pension Top-Ups Value for Money?
The current rate for voluntary Class 3 contributions is £15.40 per week. This amounts to £800.80 if you need to top up a full year.

If you are planning for retirement, this might seem like a lot, but remember, you are buying a guaranteed, inflation-proofed income for the rest of your life.

At the current State Pension rate, if you are missing a year of National Insurance credits, your £800.80 would buy you additional income of around £266 per year. This is a return on investment of over 33% per year.

To put this in perspective, if you put the £800.80 in a private pension with the aim of buying a guaranteed, index-linked annuity, you could increase your pension income by around £26.92 per year.

Of course, a private pension offers other advantages, such as flexibility, and the ability to pass your fund on to your beneficiaries when you die. But in terms of numbers, topping up your State Pension is by far the most effective use of the money, increasing your returns tenfold.

So if you have gaps in your National Insurance record over the past six years, or you are no longer building up credits, it is well worth making voluntary contributions, providing you are eligible.

Please don’t hesitate to contact a member of the team to find out more about retirement planning.