The Great State Pension Top-Up

There is no such thing as a “slam dunk”, no brainer financial decision. There will always be some compromise involved, some trade off somewhere.

For some people however, this trade is as close as it comes.

Until the 5th April this year it is possible to “buy” extra State Pension entitlement for any tax years that are missing from our personal National Insurance record, going back to 2006.

However, after the 5th April, each of us will only be able to top up our entitlement for any tax years we have missed in the last six.

So over the next five weeks or so before the end of the tax year there is a “one and done” opportunity to fill any big gaps in your National Insurance record, and in the process, materially increase your State Pension.

I love stock images. No idea what is happening here. Image credit: Shuttershock.

Why should I care?

Well, as a starter for ten, the State Pension is incredibly generous.

From April 5th, the full State Pension will pay £11,973 a year to those who are fully entitled. Under the current “triple lock” guarantee, this sum will rise each year in line with the lowest figure of inflation (as measured by CPI - the Consumer Price Index), earnings growth and 2.5%.

In the current market, a “whole of life” annuity paying £11,973 a year linked to inflation would cost a healthy 66 year old (current State Pension age) around £235,000.

So while the headline State Pension income figures may not look life changing, we can see just how expensive it is to maintain. But that isn’t (directly) your problem.

Making a voluntary Class 3 National Insurance contribution to buy an extra year of State Pension entitlement costs between £800-£900 depending on the tax year you are “filling in” and this entitles you to receive just over £300 worth of extra income per annum.

So, very simply, if you live to receive around three years’ worth of State Pension payments you will get your money back.

Please note that this sum makes no allowance for tax - and the State Pension is subject to Income Tax. If buying extra State Pension entitlement carries you into the 40% or 45% tax bracket this makes the whole thing look slightly less lucrative - but still probably worth doing.

Who should think about doing this?

Everyone should at least check their State Pension entitlement. You can do this here.

This is mine for example.

So if I never worked again and didn’t buy any additional years, I would get £121.90 a week from the State Pension (adjusted for inflation) in 2056. But assuming I work until State Pension age from now, I will be entitled to the full whack.

The opportunity to buy extra years is open to men born after 5 April 1951 and women born after 5 April 1953. You can also potentially partake even if you are already in receipt of your State Pension - although it is important to note that you cannot buy any extra entitlement over and above the maximum.

There may be a number of reasons that you are missing years’ of National Insurance contributions. Perhaps you were working abroad, taking a career break or not earning enough to meet the required threshold.

If this was the case for you between 2006 and now, and you aren’t expecting to work enough years in future to top up your entitlement to the maximum “normally” - then it could be a great idea to buy extra years.

Generally, filling in gaps in your National Insurance record makes more sense for older people.

As I mentioned above, the big risk with this trade is that you buy extra entitlement and don’t live long enough to receive the extra income. By waiting until you are older you will naturally have a better sense of your career plans, health and potential longevity.

The other thing to be aware of on this front is that the State Pension age is 66 at the moment, but will increase to 67 gradually between 2026 and 2028 and further increases are likely. So younger folks are going to have to wait even longer to claim it, and that assumes that the State Pension is even around by then.

Sounds great, how do I do it?

Individuals who have not yet reached State Pension age can buy extra entitlement online through this HMRC portal.

If you are in receipt of your State Pension, close to it or are filling in gaps from when you were working abroad or self-employed, you will have to ring the Revenue (enjoy!).

As ever, none of the above is intended to constitute advice to any individual. if in doubt about your individual situation please consult with a regulated financial adviser.