Did you know how valuable your State pension is? We find often through conversations with our clients and colleagues that its true value is often misunderstood and in some cases even overlooked. In this article, I am going to show what great value can be achieved and delivered through paying a little bit of attention to this often overlooked area of financial planning
How does it operate?
Credits are obtained by contributing a set amount of National Insurance contributions (NICs) over a tax year with 35 full years needed to obtain the entire weekly amount. There has been a recent uplift from 2016 where transitional rules were brought in with the new State Pension to ensure entitlement from pre-2016 was not watered down.
How valuable is the State Pension?
Currently a 65-year-old with a full new State Pension is entitled to an inflation-linked £175.20 per week (£9,110 per annum). To add a little context, based on the current market, a replacement of this income stream via an annuity would cost c£333,000. The State Pension is one amazing deal!
How to make sure you receive the full entitlement upon State Pension age?
Checking your forecast and any gaps in NICs only takes a few moments. Have a look at our guide here for how to obtain a forecast: bdb’s State Pension and National Insurance Guide.
Once obtained you may be surprised to find gaps or credits in your NICs record. Gaps may occur where you have not paid any NICs (e.g. during a career break) or you may be due credits from claiming child benefit in the past. The important point here is that your record reflects what actually happened and from our experience, this is not always the case. Any discrepancies should be raised with HMRC to ensure your record is accurate.
Is it worth buying back missing National Insurance years?
The cost to buy back a missing year depends on the year in question however if you did not pay any NICs for the 2020/21 tax year and would like to buy back this year (voluntary Class 3 contribution) it would cost £795.60 which would provide an extra £5 per week (£260 per annum - inflation-linked). The cost of a top-up being recouped in under three years post-retirement, one of the best deals out there.
Given the value and cost of obtaining National Insurance credit, we believe it makes sense to ensure you have full entitlement and credits as far as possible. Have you checked your forecast and record recently?