Boost Your Pension By £960 A Year

by Donna Ferguson on 24 October 2008  |  49 comments
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Finally, some good news for anyone approaching retirement in the next seven years...

There's been a lot of financial doom and gloom over the past few months. And with savings and investments thrown into jeopardy by the banking crisis, those nearing retirement have been among the worst hit by the downturn.

Luckily, there is some good news for many people who do not currently qualify for the basic state pension. The Government has announced new measures to allow people to buy up to six years of additional voluntary National Insurance contributions, over and above those currently permitted.

(You could already buy up to six additional years of contributions.  Now, you can buy another six.)

This is particularly good news for women, 65% of whom currently do not qualify for the full state pension when they reach retirement. However, it also applies to men.

Why is it good news?

Currently, women need 39 years of National Insurance contributions in order to qualify for the full state pension, while men need 44. (You get a year of National Insurance contributions for each year you work.)

Each year of contribution is currently worth £160 a year. This will increase by the rate of inflation each year.

So, if you bought an extra six years of National Insurance contributions under the Government's new proposal, you will boost your pension by £960 a year, in real terms, for the rest of your life.

 Be aware, however, that these extra years don't come free - you have to pay for them.

How much do they cost?

Each extra year of National Insurance contributions costs £400.

So if you wanted to top up your pension with the extra six years on offer, you would have to fork out £2,400.

This might not seem worth it, for a £960 annual return.

But remember, you only pay that £2,400 once - while you will receive the extra £960 a year (plus inflation) until your dying day.

So, for most people, it is a really worthwhile investment.

The trouble is, not everyone is eligible to top up their pension with the extra six years.

Who is eligible?

To be eligible to buy the extra years, you must fulfil certain criteria, namely:

1.  You did not reach State Retirement age before 6 April 2008. (State retirement age is 60 for women and 65 for men.)

2. You will not reach State Retirement age after 5 April 2015.

3. You already have 20 qualifying years on your National Insurance record, taking account of Home Responsibilities Protection (HRP).

What is Home Responsibilities Protection? This is where it gets complicated.  Basically, for each year you've claimed certain other benefits - such as Income Support, Disability Living Allowance and, most importantly, Child Benefit - you should automatically receive a year's National Insurance contribution. You can read more about HRP on the pension service website.

This is good news for anyone who took time off work to have children, and claimed Child Benefit while they were not working. For each year you claimed Child Benefit, you will receive a year of National Insurance contributions towards your pension.

So if you have never worked, but claimed Child Benefit for 20 years, you will qualify for this new scheme to top up your pension by an extra six years.

Similarly, if you're a woman who has worked for 19 years, and claimed Child Benefit for 20 years, you have no need to pay to top up your contributions. You will be eligible for the full state pension because you will have 39 years of National Insurance contributions.

If you are unsure whether you have enough years to qualify for the top-up scheme, or do not know whether you will have made enough contributions to be eligible for the full state pension, I recommend you get a free state pension forecast from The Pension Service. You can find out more about this here.

Warning to low income earners

If your income in retirement is less than £124.05, you have no need to buy any extra years. You will automatically qualify for the full basic pension - even if you do not have the right amount of qualifying years.

More changes

Other changes coming in include a reduction in the number of working years needed to qualify for a full State Pension.

From April 2010, both men and women will need just thirty years of National Insurance contributions to qualify for the full state pension - but the state pension age for women will also start rising from 2010. By 2020, the state pension age for both men and women will be 65.

To find out your state pension age, use this calculator on The Pension Service website.

Good on you, Gordon!

This is a long-awaited measure and one that the Government should be praised for, in my opinion.

It will make a huge difference to everyone who does not currently qualify for the full state pension.

And in these credit-crunched, penny-pinching times, it's not a minute too soon..