Is it worth making up a shortfall in your National Insurance contributions to receive a higher State Pension? How much will it cost and how can you calculate the benefit? This article examines the pros and cons of of making voluntary contributions.
- What is a voluntary (Class 3) National Insurance contribution
- Do you have unfilled years in your National Insurance record?
- How much State Pension are you currently forecast to receive?
- How to decide whether to pay Class 3 contributions
- Are you sure? Checking the impact of paying additional contributions
- How to pay Class 3 contributions
What is a voluntary (Class 3) National Insurance contribution
Most Prospect and Bectu members will have enough qualifying years, through National Insurance contributions and credits, to be eligible for the full rate of the new State Pension when they reach State Pension Age.
However, some members will not. Groups that might be more likely to qualify for less than the full rate are: people who spent a lot of their working lives abroad, people who were not in paid employment because of caring responsibilities (and did not qualify for credits), people (particularly freelancers) with irregular work / fluctuating earnings / multiple jobs at the same time.
If you have a non-qualifying year, you can consider whether to pay voluntary (Class 3) National Insurance contributions to make it a qualifying year that counts towards State Pension entitlement.
It is important to note that you can only pay Class 3 contributions in respect of a year (or part of a year) that does not otherwise count towards a qualifying year. To be able to pay Class 3 contributions, you need to have a gap in your record where you did not pay National Insurance contributions or receive a credit.
You can normally pay Class 3 contributions in respect of the last 6 years (this time limit has been extended on occasions in the past when the state pension system changed including, for example, when the new State Pension system was introduced in April 2016).
If all of the years within the 6 year (or any other relevant) time limit are already qualifying years, then there are no gaps that you can make up, and therefore no opportunity to pay backdated Class 3 contributions.
Before you decide whether to pay Class 3 contributions you need some information:
Do you have unfilled years in your National Insurance record?
Check your National Insurance record – GOV.UK (www.gov.uk)
This shows your full National insurance record, for each year since you were 16 it will say either “Full year” or “Year is not full”. If you have a year that is not full (within the relevant time limit), then you can investigate whether it is worth paying Class 3 contributions to convert it into a qualifying year.
How much State Pension are you currently forecast to receive?
Check your State Pension forecast – GOV.UK (www.gov.uk)
This shows how much State Pension you have already built up based on your record to date and a forecast of how much State Pension you would be likely to get if you worked up to State Pension Age.
If you are not currently on track to get a full State Pension, and if you have gaps in your record within the relevant time limit, you can potentially boost your entitlement by paying Class 3 contributions.
If you are already projected to get a full State Pension then paying Class 3 contributions for years you missed in the past will not boost your expected entitlement.
How to decide whether to pay Class 3 contributions
A sensible decision-making process, for considering whether to pay Class 3 contributions in respect of a non-qualifying year that you are eligible to make contributions for, could be:
- Can I afford to make these contributions?
- If the answer to (1) is yes – will making these contributions boost my State Pension?
- If the answer to (2) is yes – will the boost in State Pension be worth more than Class 3 contribution costs?
To go through the above steps in a bit more detail:
1. Can I afford to make these contributions?
There are many calls on your money. If you need the cash for day-to-day expenses, or reducing an overdraft or other debt, then paying voluntary National Insurance contributions may not be a priority for you.
2. Will making these contributions boost my State Pension?
Using the information above, you can tell if you have any unfilled years within the relevant time limit for making voluntary contributions.
If you do, you should first check if you qualify for National Insurance credits for any of these years.
See: National Insurance credits: Overview – GOV.UK (www.gov.uk)
Your State Pension forecast can then tell you whether you are projected to be eligible for the full rate of the new State Pension.
If you are already projected to qualify for the full rate of the new State Pension anyway, then paying Class 3 contributions may not result in any additional benefit.
You may end up missing some years in the future but can buy those years at that point, if needed.
The current requirement for a full new State Pension is 35 qualifying years. It is possible that this could be changed in the future (for example, as State Pension Age increases), but in that event it is likely that the time limit for making voluntary contributions would be extended.
Many people will have worked for more than 35 years but still be projected to qualify for less than the full rate of the new State Pension. The most likely explanation for this is that they paid lower National Insurance contributions under the old State Pension system before April 2016.
Years paid at the lower rate of contributions did not convert one-for-one into the new system that was introduced in April 2016. Any members affected by this can potentially boost their State Pension by making voluntary contributions (if they have missing years in scope to contribute for).
3. Will the boost to State Pension be worth more than Class 3 contributions cost?
The current (2023/24) rate of Class 3 contributions is £17.45 per week (£907.40 for the year).
This rate will apply for contributions in respect of the current year or any year prior to the two immediate past years.
The rates for 2022/23 (£15.85pw / £824.20pa) and 2021/22 (£15.40pw / £800.80pa) apply for contributions in respect of those years.
Changing a year from non-qualifying to qualifying, usually boosts State Pension entitlement by 1/35th of the rate of the State Pension (£5.82 per week or £302.86 per year).
(If your State Pension entitlement is already closer to the full rate than this the increase will be restricted so the overall amount is capped at the full rate.)
If you qualify for means-tested benefits in retirement (the Pension Credit) then boosting your State Pension may just reduce what you get from these benefits.
In some cases, paying Class 3 contributions for just one week can turn a year into a qualifying year. In these circumstances it should be clear that the boost in State Pension is expected to be worth more.
At the other end, it can take a whole year of Class 3 contributions for a year to become qualifying.
In these situations, the comparison of the cost to the benefits depends on how long you live to receive the extra State Pension for. The apparent payback period is just under 3 years (ie you would have to live to receive the State Pension for 3 years to benefit from the contributions).
However, the additional State Pension could be taxed, and this would make the payback period longer.
Nobody can tell the future with certainty but the life expectancy of all groups of members (who are not suffering from a life-limiting illness) is longer than these payback periods.
Are you sure? Checking the impact of paying additional contributions
If you have gone through the steps above and think that it is worth paying Class 3 contributions, you should contact the DWP to check what impact this will have.
If you are under State Pension Age contact:
Contact the Future Pension Centre – GOV.UK (www.gov.uk)
If you are over State Pension Age contact:
Contact the Pension Service – GOV.UK (www.gov.uk)
You may also want to consider what other opportunities you have to save for your retirement and how they compare.
How to pay Class 3 contributions
Details on how to pay Class 3 contributions to HMRC are available from:
Pay voluntary Class 3 National Insurance: Overview – GOV.UK (www.gov.uk)