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Have you checked your National Insurance (NI) record lately? This summer, a key “window” will be closing for a little-known rule about State Pensions. After 31 July the chance will be gone to fill more “gaps” in certain individuals’ NI records. Missing the opportunity may lead some people to lose out on hundreds (perhaps thousands) of pounds in extra income across retirement. Fortunately, in April 2023 there is still time to act. Below, our Burnley financial planners explain what the 31 July deadline is, why it matters and how taking advantage of extra voluntary NI contributions could affect an individual’s retirement plan. We hope this content is useful to you and please contact us if you want to discuss your financial plan with an experienced financial planner in Padiham.
What is the 31 July 2023 deadline for NI contributions?
NI contributions play a key role in determining the income for your State Pension (which, in turn, is typically a key pillar in an individual’s overall retirement plan). In 2022-23, the full new State Pension offered £185.15 per week – equating to £9,627.80 per year. Your State Pension income is guaranteed for the rest of your life. Also, under the “triple lock” system it rises each tax year by at least 2.5% to preserve the buying power of your income. Taking these benefits together, the State Pension is widely regarded as a very good return on investment for pension planning.
You need at least 35 “qualifying years” of NI contributions on your record to get the full new State Pension in 2022-23. Yet many people have “gaps” on their record – or missing/incomplete years – for various reasons (e.g. periods of unemployment or career breaks). To fill these gaps, an individual can make voluntary NI contributions to try and boost their State Pension income.
Normally, you can only do this up to the past 6 tax years. However, a transitional arrangement is currently in place which allows an individual to fill gaps in their NI record as far back as 2006 (17 years). This arrangement is set to expire on 31 July 2023.
Why does the deadline matter?
For many people, gaps in the NI record go back further than the last 6 years. Perhaps the gaps exist from 10 years ago or more. By ignoring the 31 July 2023 deadline, these people may miss the chance to fill these gaps and gain a better State Pension deal in retirement.
Each qualifying year on your National Insurance record after 5 April 2016 adds £5.29 a week to your State Pension (i.e. £185.15 divided by 35, representing the total qualifying years needed to complete your record). In future tax years, this figure would rise due to the triple lock system.
It costs £824 to make a voluntary NI contribution for a full qualifying year. This can add up to £275 to your pre-tax State Pension annual income later. As such, making the contribution starts to provide a return after a minimum of three years. If you have three missing years on your NI record 10 years ago, for instance, then you could be missing out on up to £825 of State Pension income (£275 times 3). However, in this case, letting the 31 July deadline pass without further action could mean that this income is lost. After this date, voluntary NI contributions will only be available for the past 6 tax years.
What action should I take?
Before rushing to make voluntary NI contributions it is important to first check your NI record and consider speaking with a financial adviser. If you already have 35 qualifying years under your belt then your record is already complete. Also, consider how much longer you will make NI contributions before you retire. For instance, if you have 25 qualifying years on your record and you plan to work another 10 years before reaching your State Pension age, then you likely will automatically accrue the required 25 qualifying years via your employment.
Another factor to consider is how long you are likely to live. If your health is poor and you might not live past the next three years, then it can help to discuss your options with an adviser. Here, voluntary NI contributions may not pay for themselves later. You also cannot pass down a State Pension to loved ones as an inheritance (although the rules are more complex for those who reached State Pension age before 6 April 2016). By contrast, pension “pots” (known as defined contribution pensions) can be handed down free of inheritance tax. Therefore, if you will not live long and your main goal is to provide a meaningful legacy to beneficiaries, it might make sense to focus on your own pension savings rather than maximising your State Pension.
Your State Pension has important implications for multiple parts of your financial plan – not just retirement but also tax planning and estate planning. Speak to a financial adviser for the best insight and guidance in light of your financial goals and situation.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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T: 01282 772938
E: info@elmfieldfp.co.uk
