The Price Of Your Pension Is Going Up
From April 2009, the cost of buying extra years to qualify for the basic state pension will jump by more than £200.
Pensions seem to be all bad news these days, and recent weeks have produced two more dismal developments.
The first is the widely-reported scandal that 95,000 former public sector workers face pension cuts following a blunder in Whitehall. The second stems from a little-noticed piece of small print in the recent pre-Budget report. This merits further attention, because it will make boosting a shortfall in your state pension entitlement dramatically more expensive.
There is little you can do about civil service blunders, but if you act fast there is still time to top up your state pension on the cheap. Don't delay, because after April the cost will increase by around 50%.
The state will provide
The phrase 'basic state pension' is misleading. It suggests everybody gets that basic amount, but they don't.
The amount you actually get will depend on the National Insurance (NI) contributions you have made during your working life.
To get the full amount of £90.70 a week for a single person and £145.05 a week for a couple, you must have built up enough "qualifying years" before reaching state pension age (currently 65 for men and 60 for women, steadily rising to 65 for women between 2010 and 2020).
A qualifying year is a tax year where you have earned enough to pay NI contributions. This is currently at least £4,680 if you are employed, or £4,825 if self-employed.
Many people, mostly women, who have given up work to raise children or care for ill or elderly relatives, may also be treated as having paid or being credited with NI contributions.
Currently, men normally need 44 qualifying years and women 39 years to get the full basic state pension. So you have to put in the hours.
That will ease from 6 April 2010, when the number of qualifying years shrinks to a less daunting 30 years.
If you fall shy of the maximum, you will only get a proportion of the basic state pension, depending on the number of years assembled, and whether you retire before 6 April 2010 or after. You can get further details from the Directgov.uk website.
To check if you are heading for a shortfall, order a state pension forecast from the Future Pension Centre on 0845 300 0168 or by writing to: Future Pension Centre, The Pension Service, Tyneview Park, Whitley Road, Newcastle upon Tyne NE98 1BA. The Pension Service has further details.
I ordered my state pension forecast a few years ago, and unlike most pension documents, it was relatively clear and easy to understand. In fact, I recommend it to everybody.
If you're heading for a state pension shortfall, you can buy extra years in the scheme by making voluntary additional Class 3 NI contributions, as Donna Werbner explained in Boost Your Pension By £960 A Year.
Currently, qualifying year will cost you £421. In return, you get at least an extra £107 on your state pension, every year for the rest of your life, according to calculations by Laith Khalaf, pensions analyst at IFAs Hargreaves Lansdown. He also calculates that buying extra years pays off within just three or four years of retiring. You might even get more, depending on your sex and when you retire.
That is a pretty handy rate of return, provided you don't pop your clogs within a year or two of hanging up your boots.
Better still, you avoid the investment risk of putting money into stocks and shares, via a personal pension or an Isa. That's because the government, or rather the taxpayer, shoulders the risk.
If that sounds convincing, don't hang about. Your state pension forecast could take a month or two to arrive, so order it today.
Why the hurry? Because the Pre-Budget report revealed that, from April 2009, the cost of buying extra years will rise dramatically from £421 a year to £627 a year. This is designed to offset the cost of reducing the number of qualifying years to just 30 years.
Cynics might also say that the Ministers have realised that extra years have been a bit of a bargain, and raised prices accordingly.
Laith Khalaf says the new rate is still a good deal, but obviously, it is much better if you snap it up now. Think of it as picking up a bargain in the New Year sales.
You can pay voluntarily NI contributions to cover missing years all the way Back to 1996.
Not everybody should be buying extra years in the basic state pension. If you are retiring after 6 April 2010 with more than 30 qualifying years, you will get the full basic state pension anyway.
Women who have given up work to raise a family or care for a relative may be able to top up their state pension for free by claiming Home Responsibilities Protection instead.
And if you expect to claim means-tested benefits such as the pension credit in retirement, buying extra years will only lose you benefits.
You also have to buy enough extra years to exceed the minimum 10 years, otherwise you still won't get a penny in basic state pension.
Mix and match
With stock markets and property markets falling, and final salary pension schemes turning a deep shade of red, buying extra years in the basic state pension looks increasingly attractive.
It isn't without dangers. Many analysts fear the basic state pension is unaffordable, given the ageing population and the rapidly increasing government debt, and could be trimmed at some point.
That's why you should also be saving into an occupational, personal pension and Isas, and maybe property too. Because even if you qualify for the full amount, the basic state pension is, well, rather basic.