State Pension Alert: Workers with National Insurance shortfalls have weeks to plug the gap

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“With the end of the financial year is edging ever closer, many savers are looking to top up pensions and Individual Savings Accounts, ahead of looming tax rises. Another equally urgent and potentially rewarding strategy, however, is to check your National Insurance (NI) record for any missed years of contributions.

“Buying back missed years can be a good way to bolster retirement income as just one qualifying year of NI at the standard rate of £824.20 adds up to £275 per year (1/35 of the full rate of the state pension) to your pre-tax state pension – putting the breakeven point of making those contributions at three years after you start claiming your state pension.

“If you live 20 years beyond the current state retirement age of 67, each year bought back could give you up to £5,500 per year to take home, a great return particularly when you consider this is likely to rise in line with inflation. Make up five missing years at a cost of about £4,121, for example, and that could potentially be worth up to £27,500 over a typical 20-year retirement.

“However, anyone with a shortfall in their record needs to act fast as they only have until midnight on April 5 to buy back their missed years to qualify for a full state pension. Failure to do so by the deadline might mean they don’t receive the full pension payment they are expecting.

“This particularly applies to shortfalls between the 2006/07 and 2016/2017 tax years, as from April 6, 2023, only missing contributions over the past six years can be made up. The concession to buy back more than six years only applies to those on the new state pension, which came into force in April 2016, so they should use this opportunity to improve how much they receive while they still can.”

With less than seven weeks to go until the deadline, here is a five-step guide for men born after April 5, 1951, and women born after 5 April 1953, to help them decide whether it’s worth making up any missed years before they are lost forever.

There are several reasons for having a gap in your NI record - from a career break or taking time out to raise a family, to caring for elderly relations, living and working abroad, earning a low income or being self-employed and not paying contributions, again because of a low income.

The danger of gaps is that you don’t accrue enough qualifying years to receive a full state pension. Britons typically need at least 10 years of NI contributions to receive anything at all and at least 35 years to receive the maximum amount, which currently stands at £9,600 a year for those retiring after 6 April 2016 and will rise to £10,600 from April. Remember, it does not need to be 35 consecutive years, but you must have hit that target over the course of your working life to receive the full entitlement.

If you are not at state pension age, simply check your NI contribution record by logging onto the State Pension forecast calculator, which you can access through your Government Gateway. If you don’t already have a Government Gateway user ID, it is easy to set this up. You simply need your name, email address and a password. You must then answer security questions to verify your identity, for which you’ll need your National Insurance number, passport, pay slips or P60.

You will receive a State Pension summary outlining what year you are entitled to receive a state pension with a guide on the amount you will receive weekly, monthly and per year (without factoring in inflation) according to your current and projected contribution level.

The summary also outlines how much you would receive if you continued to contribute and what steps you need to take to improve the forecast if there are any shortfalls.

For those who are already at state pension age, they can simply check their National Insurance record for any incomplete years since 2006.

Your State Pension Summary will clearly state how many years of contributions you already have, how many you have left to contribute before you retire and the number of years in which you did not contribute enough. These will be marked as ‘Year is not full’ with guidance on how much you need to pay in voluntary contributions for each year by April 5.

Whether you need to pay up depends on factors such as how many more years you plan to work. Those aged 45 and over who are close to retirement age and won’t have enough time to achieve 35 qualifying years to receive the full state pension may be more inclined to top up, while someone close to retirement and in poor health might not feel it is worth it.

For younger people, it may not be worth the expense of filling the gaps as they will hit the 35-year contribution target anyway over the course of their life through work or NI credits (more on these below). For them, it would be taking a real risk to buy now unless they are sure they won't make them up later, for example, because they live overseas.

Which years you have missed is also key. If you have gaps between the 2006/07 and the 2016/2017 tax years, these will no longer be available to buy back after midnight on April 5, so prioritise them first. After that the number of extra years that be filled drops down to the last six tax years, which gives you more time to plug missed years between April 2017 and today.

Ultimately, any potential gain from buying voluntary NI contributions will be wiped out if your health is poor and you are unlikely to live long enough to benefit – with the breakeven point for buying back one year to make financial sense three years after you start claiming your state pension.

There are also lots of complexities to consider. If you are a higher earner, for example, it might not be worth topping up your NI record as it could tip you into a higher tax bracket when you receive your state pension income taking you longer to break even on voluntary top ups.

Calculating whether to top up can be confusing and ultimately there is no point paying for more years than you need because you won’t get that money back.

The best solution is to call the Government’s Future Pension Service on 0800 731 0175 to double check how many years you can buy and whether voluntary contributions will add to your state pension. Those who have already reached pension age must contact the Pension Service on 0800 731 0469.

What you might find when you chat to a government pension expert is that you have more years built up than you realise as you can also build up NI years for free by acquiring tax credits. Scenarios that can potentially earn NI credits include being a parent or guardian registered for child benefit for a child under 12, being on statutory sick pay, looking for work, fostering a child or caring for a sick or disabled person, being on jury service, being on maternity, paternity or adoption pay and even being wrongly imprisoned.

While there are certain stipulations for each scenario, NI credits can often be automatically applied, so it is always wise to put in a manual claim if they are not on your record. Your adviser can chat through this with you and offer guidance for your unique situation and whether buying a missing year will actually give your eventual state pension a bump up.

For most people the cost to make up a full year by April 5 is £824.20 for gaps between 2006/07 to 2019/20. For the most recent two years, the rate is slightly less at £795.60 for 2020/21 and £800.80 2021/22. This rate of NI contribution is known as Class 3.

However, people pay different rates depending on their situation. While those in full employment pay Class 1 NI contributions which are based on earnings and automatically deducted by their employer, the self-employed pay Class 2 and 4 based on their taxable profits and those living abroad pay Class 2.

Class 2 is considerably cheaper at about £160 for one year than Class 3, so when you consider that one qualifying year of NI adds about £275 a year or £5.29 a week to your state pension for the rest of your life – it's easy to see the value of buying back those missed years.

For someone who was living abroad during their missed year, they need to download and complete HMRC’s CF83 form and send it to the address on the form. To qualify for Class 2 NI contributions, you will need to prove you lived in the UK for at least three years in a row or paid NI contributions for at least three years before you left the UK and give the names and addressed of the employers you worked for during your time overseas.

Meanwhile, for those who have retired abroad, they must pay Class 3 NI rates for any missed years. Below is an example of who is eligible to pay Class 2 and Class 3 contributions:

Who can pay voluntary contributions?

Source: HMRC

Once you have decided how many years to top up and which ones exactly, contact HMRC to find out the cost and how to get the 18-digit reference number you need to actually make a payment and ensure the sum is recorded on your NI record.

This number can be given to you over the phone or sent by post but allow at least two weeks for this to come through by mail. Once you have the 18-digit number, paying for the missed years can be done by online bank transfer, from a bank at your bank or building society or paid for by cheque posted a cheque to HMRC.

With the clock ticking, anyone looking to make up the shortfall should start the process straightaway to ensure you make up those missed years before it is too late.