Top-up, anyone? Checking your State Pension

01 July 2022

Retirement for some may seem a while off, but careful planning for your eventual retirement is always important.

We find that in most instances, retirement income for an individual is achieved through a number of sources. As an example, this combination might be their own pension income, some investment income and normally the State Pension. The State Pension has of course been topical this year because of the disconnect for one year of the 'triple-lock' for the way the income is increased. This year's increase was lower than would have been paid under their standard commitment, however, the government plans to re-establish this next year, I would guess, subject to affordability and prevailing inflation rates. Watch this space I would suggest.

How is State Pension entitlement calculated?

For reference, State Pension income is based on an individual's National Insurance Contribution (NIC) record when they reach State Pension age. In current terms (tax year 2022/2023), a full new State Pension should provide income of £185.15 per week (£9,627.80 pa). The benefit is paid gross, but is taxable and more can be found here: https://www.gov.uk/new-state-pension/what-youll-get

Individuals would normally need at least 10 qualifying years on their National Insurance record to receive any new State Pension under the new rules which came into effect on 06 April 2016. A higher State Pension may be payable if you would have been entitled to a certain amount of Additional State Pension under the old rules.

For those without a National Insurance record before 06 April 2016, 35 qualifying years of National Insurance contributions will be needed in order to receive the full new State Pension.

Checking your State Pension forecast

We are advocates of checking an individual's State Pension entitlement to ensure the maximum benefit will be available and a link to the process to do this can be found here: https://www.gov.uk/check-state-pension

Topping up your State Pension

If there is a shortfall in your records, it might be possible to top this up by making voluntary National Insurance Contributions. We often explore this option for clients, as it can offer significant value, and we thought it might be helpful to provide a generic worked example to give a 'real life' idea of what might be available to individuals who have gaps in their NIC records.

The example below is based on an individual who requires seven more years of NICs to reach the full State Pension. This individual is currently entitled to a State Pension of £151.05 per week, a shortfall of £34.10 per week in current terms to the maximum available in this example of £185.15 per week. There are some 'gap years' in contributions, and the cost of topping these up and the benefit this would secure is as follows:

Example tax year

Example cost of topping up

Comment / example only

2013/14

£824.20

Would provide £4.73 per week of State Pension

Expires 05 April 2023

2014/15

£824.20

Would provide £4.73 per week of State Pension

Expires 05 April 2023

2015/16

£824.20

Would provide £4.73 per week of State Pension

Expires 05 April 2023

2016/17

£824.20

Would provide £5.29 per week of State Pension

Expires 05 April 2023

2017/18

£729.10

Would provide £5.29 per week of State Pension

Expires 05 April 2024, cost increases 5 Apr 2023

2021/22

£800.80

Would provide £5.29 per week of State Pension

Expires 05 April 2028, cost increases 5 Apr 2024

Total:

£4,826.70


In this example, if the individual were to top up their NICs for the above six tax years, this would increase their State Pension entitlement by £30.06 per week, i.e., to £181.11 gross per week.

There would then be one more tax year for which the individual could make voluntary NICs to top up their entitlement to the maximum available.

Value

In terms of value, if the individual topped up for the six tax years noted above, at an indicated cost of £4,826.70, this would buy State Pension income of £30.06 per week x 52 weeks = £1,563.12 pa in current terms. This should mean that in this example the individual would recoup the funds used to buy additional State Pension after just over three years of the pension being in payment. The increases in payment for inflation (or the triple-lock if re-established) should add real future value.

Clearly this is an example only, and the ability to top up a State Pension will vary by individual, depending on their circumstances and their NICs to date. In addition, the value of topping up an individual's State Pension entitlement will depend on a number of factors, including health and longevity expectations.

Summary

Planning for retirement and leaving as much time as possible to consider your options is important, and we are able to offer advice, support and help with regards to topping up the State Pension and the value this may offer.

No individual advice is provided during the course of this blog. Talk to the team at Chapters Financial to see how we can help with your financial planning.

Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899