It's a huge concern that around 70% of women and 15% of men aren't entitled to the maximum Basic State Pension in retirement. This is because they haven't paid sufficient National Insurance (NI) contributions during their working lives.
At £107.45 a week, the Basic State Pension doesn't sound like an awful lot. But it's still a good idea to do everything you can to benefit from the full amount. And the quicker you act the better, especially if you're about to retire.
You can earn a reduced Basic State Pension if you don't have enough qualifying years. A qualifying year is a tax year when NI contributions have been paid.
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Thankfully, the Government has made it easier for you to build up your entitlement to the full pension. Here's what you need to know.
What happens if I haven't paid enough NI?
A lot of people have gaps in their NI record where they haven't paid sufficient contributions. But there is a way you can make up for some of those missing years. You can improve your entitlement to the State Pension by paying voluntary NI contributions out of your own pocket. Note that voluntary NI contributions are known as Class 3.
You can still buy missing years even if you have retired and you are already receiving State Pension benefits.
If you reached State Pension age before 2010
For women who reached pension age before 2010 the minimum number of years of contributions you needed to qualify for the full Basic State Pension is 39, while for men the minimum is 44.
But, if you have less than 10 qualifying years for a woman, or 11 qualifying years for a man, you won't normally be entitled to any State Pension benefits at all.
Paying NI contributions for 39 or 44 years was a pretty tall order for many people, particularly for women who took career breaks to bring up a family.
If you reached State Pension age between 6th April 2008 and 5th April 2010, you can buy up to six years' worth of NI contributions to plug any gaps. That's providing you have accrued at least 20 years of contributions (this includes Home Responsibilities Protection for carers) and one of those years was paid contribution, ie via work.
If you've reached State Pension age after 2010
If you've hit State Pension age after 2010, the number of qualifying years required for the full State Pension is now 30 for both men and women. Each qualifying year you have will count towards 1/30th of the full pension. So, even if you only have one qualifying year, you'll still get something.
So building up an entitlement to the maximum State Pension is now a lot easier to achieve.
The Government will now allow you to buy up to an additional six years to fill in the gaps in your NI record. Payments must be made within six years of the year you want to buy back (so you can buy all six years from 2006/07 currently).
Additionally, you may be able to buy an additional six years going right back to 1975/76. However, you must have accrued at least 20 years of contributions (this includes Home Responsibilities Protection for carers) to be able to do this.
How much do voluntary NI contributions cost?
To buy back a missing year at today's rates will cost you £689. But don't forget the NI rates change each year. From the beginning of the new tax year – 6th April 2013 – the cost will step up to £704.60.
So, if you've been thinking about buying some extra years, we suggest you get your skates on before the new higher rate arrives in April! If you buy six missing years at the current rate, it will cost you £4,134. But wait until after 6th April and the cost rises to £4,227.60 – that's an extra £93.60, which you could easily save by acting now.
Why should I pay voluntary NI contributions?
Quite simply, paying voluntary NI contributions will entitle you to a bigger State Pension. Of course, if you have adequate pension provision of your own, you may decide topping up the State Pension isn't necessary.
What are the risks?
If you're likely to be on a low income during retirement, buying back extra years may not help you. If you qualify for Pension Credit – or think you might – you'll receive a minimum income of £161.24 a week (based on current rates) anyway, so you'll effectively get the full State Pension even if you haven't paid enough NI. It must also affect your eligibility for other benefits such as Housing Benefit and Council Tax Benefit.
If you're in poor health, you may want to think twice before buying missing years. You may not survive long enough to make it worthwhile.
If you're more than a year off State Pension age, don't worry too much about buying extra years. If there's plenty of time to reach the 30-year qualifying target, don't waste your money unnecessarily. And don't forget the Government is planning to introduce a flat-rate pension of £144 a week in 2017.
You may be entitled to extra State Pension through your spouse's NI record. Check this out to make sure you don't buy any extra years you won't actually need.
Above all, get a State Pension forecast. This will tell you whether paying voluntary NI contributions will improve your entitlement to the State Pension. You can do that at the Pension Service
And finally, to buy extra years, go to the HMRC website
. You can pay monthly by Direct Debit or quarterly. For more information, call the Pension Service on 08456 060 265.
- 1. No savings
Figures from charity Age UK show that 29% of those over 60 feel uncertain or negative about their current financial situation - with millions facing poverty and hardship. Even though saving for retirement is not much fun, the message is therefore that having to rely on dwindling state benefits in retirement is even less so. To avoid ending up in this situation, adviser Hargreaves Lansdown recommends saving a proportion of your salary equal to half your age at the time of starting a pension. In other words, if you are 30 when you start a pension, you should put in 15% throughout your working life. If you start at 24, saving 12% of your salary a year should produce a similar return.</p>
- 3. Mortgage debts
Recent research from <a href="http://globalcare.aviva.co.uk/">Aviva</a> found that 17% of over-55s are still paying off a mortgage, with an average of £63,555 left to clear. And figures from equity release lender More 2 Life suggest that more than 100,000 over-65s are still struggling to pay off their mortgages. The pre-recession popularity of interest-only mortgages and the poor performance of linked investment vehicles, as well as the average age of a first-time buyer rising to 35, are among the reasons why. But meeting monthly mortgage repayments during retirement can have a big impact on day-to-day living costs such as food and household bills. Ways to avoid being caught out include taking out a mortgage over a shorter term that leaves you well clear by retirement age and overpaying on your mortgage when you can. If it is too late for that, downsizing could be an option, while equity release plans could also be worth a look.</p>
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- 4. Deal with default notices
<p>A default notice is note that a lender puts on your credit file if you fall behind with your payments. It is a warning sign to future lenders about your reliability to repay credit and could mean that they will be less likely to lend to you or will increase the interest rate.</p>
<p>If the default notice is incorrect, perhaps because you have repaid the loan in full or did not take out the credit and suspect that you have fallen victim to fraud, you can apply to have a default notice removed. A default notices will only be removed if it is factually incorrect – not simply because you are embarrassed by it.</p>
- 4. Huge care costs
The cost of a room in a care home in many parts of the country is now over £30,000 a year, according to figures from Prestige Nursing and Care. So even if the prime minister announces a cap on care costs - last year the economist Andrew Dilnot called for a new system of funding which would mean that no one would pay more than £35,000 for lifetime care - families will still face huge accommodation costs. Ways to cut this cost include opting for home care rather than a care home. Jonathan Bruce, managing director of Prestige Nursing and Care, said: "For older people who may need care in the shorter term, home care is an option which allows people to maintain their independence for longer while living in their own home and should be included in the cap." However, the only other answer is to save more while you can.</p>
- 5. Fraud
Older Britons are often targeted by unscrupulous criminals - especially if they have a bit of money put away. For example, many over 50s were victims of the so-called courier scam that tricked into keying their pin numbers into their phones and handing their cards to "couriers" who visited their homes. It parted consumers from £1.5 million in under two years. Detective Chief Inspector Paul Barnard, head of the bank sponsored dedicated cheque and plastic crime unit (DCPCU), said: "Many of us feel confident that we can spot fraudsters, but this type of crime can be sophisticated and could happen to anyone." The same is true of boiler room scams that target wealthier Britons with money to invest, offering "once-in-a-lifetime" opportunities to snap up shares at bargain prices. Tactics to watch out for include cold calling, putting you under pressure to pay up or lose the opportunity for good, and claiming to have insider information that they are prepared to share with you.</p>
- 6. Unpaid taxes
The average UK pensioner household faces a £111,400 tax bill in retirement as increasing longevity means pensioners are living on average up to 19 years past the age of 65, according to figures from MetLife. And every year in retirement adds an extra £5864 in direct and indirect taxes based on current tax rates to the costs for the average pensioner household. You can be forced to go bankrupt if you fail to pay your taxes, so it is vital to factor these costs into your retirement planning.It is also important to check that you are receiving all the benefits and tax breaks you are entitled to if you want to make the most of your retirement cash.</p>
- 7. Rule changes
Even the best laid plans can be derailed should the government change pension rules - especially for those already in retirement. Take income drawdown. About 400,000 individuals have set up their pensions on this basis that allows them to keep their fund intact while drawing an income, rather than buying a poor value annuity. The income they can take is therefore linked to the 'GAD rate' – set by the Government Actuary's Department and determined by the prevailing yield from a 15-year Government bond (gilt). But despite 15-year gilt yields falling sharply, the government last year slashed the maximum income that could be drawn down from 120% to 100% of the GAD rate due to fears that savers were depleting their pension pots too quickly. Many pensioners have seen their incomes plunge by more than 50% as a result - and there is very little they can do about it.</p>