Interactive Investor

Top up your state pension now to avoid contribution cost hike in April

16th January 2019 00:01

Edmund Greaves from interactive investor

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Those considering paying voluntary National Insurance Contributions (NICs) should get their skates on or face a hike in the cost of making up gaps.

Contribution costs are set to rise from 5 April with the new tax year.

Pension provider Royal London is warning those thinking of filling the gaps to make contributions before this date.

For instance, making an annual rate contribution for tax year 2010/11 currently costs £626.60. If you make the contribution after 5 April however, the cost shoots up by £153.40 to £780.

Those who reach pension age after 5 April 2016, who come under the new state pension system can fill gaps in their National Insurance record at these more favourable rates until the end of the tax year.

Steve Webb, Royal London director of policy and former pensions minister, comments: “For many people, topping up their state pension through paying voluntary NICs can produce a good rate of return because the cost of doing so is subsidised by the government. 

“But the price of voluntary NICs will rise sharply in April so those considering doing so may wish to act quickly and could save hundreds of pounds by doing so.”

It is however essential to check that filling the gaps will boost your state pension before doing so as complex transitional rules mean that top ups might not actually boost your state pension income.

You can do this by checking your state pension on the government website or by speaking to the Future Pension Centre on 0800 731 0175.

The table below shows the additional costs that you will incur for top ups after 5 April 2019:

Contribution year(s) Weekly Rate Annual rate if bought by 5 April 2019 Annual rate after 5 April 2019 Additional cost
2006/07-2009/10 inclusive £13.25 £689.00 £780 £91.00
2010/11 £12.05 £626.60 £780 £153.40
2011/12 £12.60 £655.20 £780 £124.80
2012/13 £13.25 £689.00 £780 £91.00
2013/14 £13.55 £704.60 £780 £75.40
2014/15 £13.90 £722.80 £780 £57.20
2015/16 £14.10 £733.30 £780 £46.70

Source: Royal London, January 2019

Financial planners are actively encouraging their clients to pay ahead of the end of the tax year.

Jon Treharne, managing director of Shore Financial Planning, says: “Many people will be unaware that the cost of filling historic gaps in their National Insurance record is due to be hiked in April.

“I would encourage anyone thinking of filling such gaps and who has checked that they will increase their pension by doing so, to consider whether they would be best advised to top up before 6th April”.

Why you should top up your NICs

Even paying the higher amount to make up missed years can prove good value for money as each tax year paid represents 1/35th of your entire state pension entitlement.

From the new tax year those with full state pension entitlement will receive around £168.60 per week. This means that each additional year you plug is worth around £4.80 per week for life.

This is equivalent to £250 per year. So, if you pay one extra year of NICs you’ll earn back what you paid in three years.

With the contribution costs rising from 5 April, it makes sense to get the extra contributions paid for now as you’ll get the same amount of state pension for less than after the new tax year.

However, it is important to consider your personal lifestyle and any health issues you might have or foresee, as you might not live long enough to reap the benefit of extra contributions if you are in poor health.

 

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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