Off in the distance, on 5 April 2039 to be exact, looms the possibility of our income receiving a boost from the UK government – that’s our state pension ‘retirement’ date. The thing is, although Ju has more qualifying years than I do, neither of us have enough to max out our state pension.
The question this post asks: should we make the voluntary national insurance (NI) contributions to get as much from the state pensions as we can? Please note I know very little about NI – please, please, please don’t act on this info without doing your own research.
First up let’s get a handle on our situation
The government’s kindly set up a website which everyone with an NI number in the UK can use to see your unique NI situation, and the impact it will have on your state pension. You can access it here: National Insurance Record Checker. If you haven’t already got a login to www.gov.uk, you’ll need to go through a long-winded process to get one, which takes a while but the effort could be worth tens of thousands of £££, so it’s easily worth it.
Once you’ve logged in, you’ll be able to see a whole bunch of numbers, but the important ones are:
- How much state pension your current NI contributions will buy you (£135.65 a week for Ju, £93.47 a week for me – £7053 and £4860 a year respectively)
- What the maximum state pension is you can get (a maximum of £159.55 a week for both of us – £8296 a year)
- How many years you’d need to buy to get up to the maximum amount (15 for me, 6 for Ju)
- The cost of each additional voluntary contribution year (roughly £730 a year)
A few observations on these numbers:
- There are no guarantees attached to any of this. A future government can change the rules at any time, assuming they can get the legislation passed, and contain any civil unrest which results. For example, the state pension could become means tested at some point, which might erode the state pension for us, or remove it entirely.
- For some reason, although I already have 22 years of full contributions and 6 years of partial contributions, the site tells me I need 15 more years, so 37 full years in total. As the maximum needed at the moment is 35 years, I’m confused by this and will need to try and work out what’s going on.
- The amounts are all in today’s money, meaning that by the time we retire, the £139.65 a week should be much higher, to take into account inflation, but will in theory have the same purchasing power.
- NI doesn’t just go towards the state pension, but that’s the only ‘benefit’ we’d claim so we’re ignoring the others and just considering state pension
OK, so we know where we’re at, what next?
First up, a very simple assessment:
- For me, it would cost approx £730 x 15 to buy the maximum state pension I can get, which would cost us about £11,000.
- For each year I receive the state pension, spending that £11,000 will increase my income by (52 x £159.55) – (52 x £93.47) which is about £3400 a year.
- So I need just over 3 years of state pension to make the £11,000 investment worth it (11000/3400). After that we’re in profit.
- So, assuming I live past my 70th birthday, buying the full 15 years more contributions makes financial sense.
Doing the same calculation for Ju shows making the full voluntary payments would make sense if she makes it past 69 years old. Using this basic logic, it’s a no-brainer that we should buy the full remaining years, as we hope to live well past those ages.
A bit more complexity – lost opportunity costs
But these calculations are maybe a bit too simple? What about the fact I could have invested that £11,000 in something else, rather than paying for NI contributions? I cranked up Excel and threw some numbers at it (you could use a free online calculator like this instead). Assuming that we invested £730 a year from next year for the number of years shown above, and we saw a real (after inflation) return of 4%. This shows that by my retirement age I’d have a (theoretical) pot of around £20,000. So what?
Well, I’d now need roughly £20,000/£3400 = 6 years of receiving the increased state pension to make the voluntary contributions worthwhile. Ju would need 8 years. So if we made it to 73 and 75 respectively, we’d be quids in, again it remains worth making the spend.
And a bit more complexity – loss of control
As I’ve noted above, once the NI is handed over to Her Majesty’s, they can do with it what they like. There is no guarantee that we’ll ever see a state pension, or that our pension age or amount of pension will be as predicted today. The pension might be eroded by failing to keep up with inflation. All kinds of weird and wonderful stuff could (legally) happen in the next couple of decades.
This gives me a little more pause for thought. Realistically, how likely are major changes to the UK state pension? I have no idea. I could guess about ageing populations and rising budget deficits, but it would be only a wild guess. The answer to this question is, I think, unknowable at this point in time.
The flip side to this is the risk of retained control: if we have access to the money, we might go mad and blow it on caviar or lottery tickets. Going off past performance, I can’t see this happening, but who knows?
So, what are we going to do?
Well, under the current rules we can pay voluntary NI contributions for up to 6 years in the past. This means we could wait until age 58 (me) and 67 (Ju) until we decide whether to buy the contributions, or more likely a year younger to be sure. That’s over 13 years away before we have to decide. The yearly cost of contributions will rise, but if we save and invest the money instead, we should easily counter that increase.
If we wait those 13 years, then that brings us over half way to our current state pension age. Which means that we’ll have a better idea of our health, of what governments might get up to, of how we feel about whatever we’re doing in life, and so on.
So our current thinking is we might buy a single year each, as the gov website is showing we can get it for £689 instead of £730. But after that we’ll hold onto the money (most likely in funds and bonds), and wait. We’ll keep a yearly eye on the government website to get an idea of any changes, and just keep an ear to the ground for the latest policies around the state pension.
But other than that, we plan to do nothing. It was worth doing the check-up, and feels good that we know where we stand, but there’s no need to rush into buying NI years just yet.