How to top up your State Pension

Coins in handAt £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.

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.

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 website.

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.

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