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Maximising State Pension Benefits

by Sean Donald on 31·01·2017

Simple & Sensible Planning

The need is identified by looking at:

  • The current accrued Single-tier State Pension (StSP).
  • The shortfall, if any, that needs to be made up.
  • How many potential qualifying years there are from now to SPA.
  • How many more qualifying years the client is likely to achieve from work or personal circumstances.

If there is a shortfall, there are 2 options:

  1. If there are likely to be tax years in the future where the client will not achieve a qualifying year because of insufficient earnings or Credits, then in those years, it is possible to pay Voluntary or Class 3 NICs.
  2. If there are historic gaps in a client's NI record, it may be possible to pay Voluntary or Class 3 NICs as a one-off lump sum to make up any shortfall.

If a client has the option to make Voluntary Class 3 for future years and to pay them in respect of earlier years, the DWP will be able to provide a quotation for the cost of back-filling each available year individually. A decision can be made which year(s) it is most cost-effective to pay one or more one-off contributions to, based upon the DWP quote.

Of Special Interest:

If there are eight tax years between the current tax year and 5 April prior to the client's birthday immediately prior to their SPA, it is only possible to pay Class 3 Voluntary Contributions to secure eight qualifying years. If additional qualifying years are needed, the only option will be to explore the potential for making contributions to back-fill any missing years.

Generally, it is only possible to fill historic gaps in qualifying years in respect of the previous six tax years. So, the deadline for the 2010/11 tax year is 5 April 2017.

The exception to the six-year cut off applies to males born after 5 April 1951 or females born after 5 April 1953 who have until 5 April 2023 to pay voluntary contributions to make up for gaps between April 2006 and April 2016. A discount is available if these contributions are paid on or before 5 April 2019.

Be aware if a client has got one or more historic gap years that can be filled, filling them now may be a waste of money if they achieve sufficient qualifying years in the future, but equally if the future anticipated qualifying years are not achieved for whatever reason, it may then be too late to make the Voluntary or Class 3 NICs for those historic years.

Lastly and probably most important of all, jointly with the client look back at any historic gaps in their qualifying years to ensure they were not entitled to NI Credits for any of those years. It is also always a possibility, albeit a remote one, that the DWP's records are not 100% accurate.

Are Class 3 NICs Good "Value for Money"?

The short answer is; "probably, yes"!

A payment of £14.10 per week will secure, in today's terms an indexed linked pension of £4.44 per week, but remember there is no spouse's pension under the StSP. Whilst this cost is paid out of taxed income, it is almost certainly a better return than making similar level of contributions to a PPP.

However, it is important to consider some of the drawbacks with the StSP, the main ones are:

  • The pension ceases on the individual's death.
  • If they retire abroad, residents of many jurisdictions do not receive any indexation of their State Pension.
  • Whilst indexation applies with residents of EU Member States, will that still be the case post-Brexit?