National Insurance Changes

February 3rd, 2010

Further changes taking effect from 6th April 2010 relate to National Insurance and it is important to be aware of these in order to calculate if you are likely to receive a full State Pension and if there is a potential shortfall, whether you need to take any action.

It is especially important for women to find out if they could be obtaining more money in their retirement, as women have traditionally not received a full basic State Pension.  This could be due to a broken work history, or caring for children or family members who are disabled or elderly.

From April 2010, both men and women reaching State Pension age will receive a full basic State Pension if they have 30 years of National Insurance contributions, or credits, rather than the current 44 for men and 39 for women.

The following simple steps could be considered to establish the level of State Pension you are likely to receive and if necessary, attempt to boost it:

Step One:
Make sure you know the exact date your State Pension can be claimed, as this is changing for women born on or after 6th April 1950.State Pension age is 65 for men born on or before 5 April 1959 and 60 for women born on or before 5 April 1950. For those born later the State Pension age is increasing as follows:

  • For women born on or after 6 April 1950, but before 6 April 1955 the State Pension age is rising from 60 to 65 between 2010 and 2020.
  • For women born on or after 6 April 1955, but before 6 April 1959 the State Pension age is 65.
  • For men and women born on or after 6th April 1959 the State Pension age is between 65 and 68.

State Pension age will increase for both men and women from age 65 to 68 between 2024 and 2046.

Step Two:

Obtain a State Pension Forecast to establish how much State Pension you have built up. The forecast shows details of your entitlement to the Basic State Pension, the State Earnings Related Pension, the State Second Pension and any Graduated Retirement Benefit.

A forecast can be obtained by completing and returning form BR19 to The State Pension Forecasting Team at The Future Pension Centre in Newcastle, or alternatively a forecast can be requested by phone or online.

Step Three:

Explore future work options.  If you continue to work past State Pension age, you will not pay National Insurance potentially boosting your take home pay. If you do remain in employment past State Pension age, however, you should ask for the HMRC form Certificate of Age Exception (CA4140 or CF384) which tells your employer not to deduct any NICS from your earnings.

Step Four:

Consider delaying claiming your State Pension as this could boost your income in retirement. This applies to the Basic State Pension, the State Earnings Related Pension, the State Second Pension and any Graduated Retirement Benefit.

If you delay for at least 5 weeks, you will receive an extra State Pension at a higher rate than would have applied at your State Pension age. Your State Pension is increased by 1% for every 5 weeks you defer.  This equates to 10.4% extra a year.  So, for example, if your State Pension was £95.25 a week and you decided to delay drawing it for 5 years, the pension you would then receive would be £144.78 a week.

Alternatively, if you defer your State Pension continuously for at least 12 months, you can choose to receive a lump sum. The lump sum is equal to the amount of pension you would have received plus interest. The rate of interest used equates to 2% above the Bank of England base rate.

Using the above example, the lump sum would be approximately £26,000 (before tax).  This assumes the base rate was 0.5% (therefore a rate of 2.5% would be applied) for the entire 5 years.  Your State Pension will then be paid at the same rate as it would have been had it not been deferred, and the lump sum will be taxable at the highest rate of tax that you pay on your non-savings income. So, if the highest rate paid on your non-savings income is the basic rate, the whole lump sum will be taxed at 20%.

If you are already drawing your State Pension, you can still take advantage of the deferral options by deciding to stop receiving your pension for a period.  You can only decide to do this once and must usually be a UK resident.  If you are a non-UK resident the ability to do this will depend on the country in which you reside.

There are two circumstances when deferring pension would not build up additional State Benefits:

  1. Any days you are receiving certain benefits such as carers allowance, short-term incapacity benefit, severe disablement allowance, unemployment supplement, widow’s pension, widowed mother’s allowance and receipt of another type of State Pension.
  2. Any days you are in prison for committing a criminal offence.

Step Five:

Establish if buying extra National Insurance contributions could increase your State Pension entitlement.

The requirement to make up a shortfall may diminish after 6th April 2010 given that after this date a reduced number of years will provide a full basic State Pension.    However, eligibility for bereavement benefits will remain at up to 39 qualifying years for a woman and 44 for a man.  Bereavement benefits are payable if someone dies to their spouse or civil partner if under State Pension age, and based on the deceased’s National Insurance contributions.  Whether this influences your decision to purchase additional State Pension is dependant on your individual circumstances.

If you decide you would like to make up a shortfall, any voluntary contributions must usually be paid no later than six years after the tax year to which they relate and you can make these contributions even if you have already reached State Pension age.  As an example, voluntary Class 3 contributions for the tax year 2008-09 have to be paid by 5th April 2015, but the rate may increase if you make the payment more than two years after the end of the relevant tax year.

It is important that you seek advice if you think this could be an option as this is a complex area.  The ability to purchase additional contributions for certain years and the rate at which they can be purchased depends on the date you reach State Pension age.

Buying additional State Pension will not suit everyone and it is important that advice is sought.  An improved State Pension may reduce any income-related benefits, for example, Pension Credit, Housing Benefit or Council Tax Benefit that you or your partner may receive, or may receive in the future.  As the State Pension is taxable, an improved State Pension may result in you paying more tax.  It may be possible for you to use contributions from your late spouse or civil partner, or former spouse or civil partner to improve your basic State Pension negating the need for you to pay additional contributions.  Your decision may also be influenced by your life expectancy, the date you reach State Pension age and the number of qualifying years you expect to have by that date.

In conclusion, there are a number of actions you can consider to try to ensure you receive the maximum basic State Pension, however it is important that advice is sought to ensure any action taken is the most appropriate for your circumstances.