Triple lock and inflation make National Insurance deal potentially worth £77,400

New calculations have highlighted the potential benefits that plugging any missed gaps in a National Insurance (NI) record could bring, which could see some boost their state pension pots by as much as £77,400 over 20 years.

The calculations, carried out by interactive investor (ii), come following the DWP’s recent announcement to extend the deadline to cash in on missed National Insurance (NI) credit years from July 2023 to April 2025. A full record of NI contributions qualifies a person to receive a full rate of state pension.

Usually, people are allowed to plug up to six years’ worth of gaps in an NI record, dating back six years from the time of purchasing.

However, there are currently special rules in place that allow eligible candidates the opportunity to go back a further 10 years (to 2007/08), as long as they do so before April 2025.

Combining this NI deal with the triple lock and inflation, eligible Britons who do plug the gaps could boost their state pension pots by as much as £77,400 over a span of 20 years, ii have said.

But it should be noted that this is only available to people who claim the new state pension and reach state pension age on or after April 6, 2016.

How do National Insurance contributions work?

The full new state pension is currently worth £203.85 a week, but the amount a person receives depends on how many ‘qualifying’ NI years they have. People mostly build up NI years through working and paying NI, but people can also collect them by claiming certain benefits.

To get the full state pension, people need around 35 years’ worth of contributions, although depending on a person’s age, they may need more. Buying extra years involves paying what is known as voluntary class three NI contributions, which currently cost £17.45 a week or £907 for the year.

According to ii, one year’s worth of voluntary NI contributions boosts a state pension income by approximately £303 over the year.

However, this additional £303 will gradually increase in line with the triple lock and “be worth £484” in 20 years, provided that the state pension increases by at least 2.5 percent each year. The actual increases will be determined by the highest figure out of inflation, average wages and 2.5 percent.

Low-earning self-employed people earning under the small profits threshold of £6,725 in 2022/23 and 2023/24 may be eligible to pay class two voluntary contributions, which are cheaper.

These cost £3.45 per week or £179 per year to buy an extra year of state pension compared to £17.45 per week or £907 per year for employees.

The ii experts said: “This means that self-employed people with low earnings might be able to buy extra state pension potentially worth £77,400 over 20 years for only £1,794.”

The calculations

According to interactive investor calculations, somebody purchasing 10 years of NI contributions at the cost of £9,070 (10 x £907) could boost their state pension by £77,400 over a 20-year retirement, £33,946 over 10 years and £15,927 over five years.

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This is based on the new full state pension payment of £10,600 for the 2023/24 tax year.

Purchasing six years at a cost of £5,442 could translate to an increase of £46,440 in a person’s state pension over 20 years, £20,368 over 10 years, and £9,556 over five years.

However, the experts said that even purchasing one additional year at the cost of £907 could result in a “significant uplift” in a person’s state pension. This would see the pot rise by £7,740 over 20 years, £3,395 over 10 years and £1,515 over five years.

Alice Guy, head of pensions and savings at interactive investor, commented: “The extension of the National Insurance deadline is amazing news for anyone with gaps in their national insurance record and that often includes self-employed people, and anyone who’s taken time out to care for loved ones.

“Self-employed people often struggle to save enough for retirement as they don’t have access to a workplace pension and can face periods with a lower income when they can’t afford to pay into a pension. So, it’s vital they keep an eye on their state pension and make sure they receive the maximum possible.”

Ms Guy added that paying extra voluntary National Insurance contributions “can be amazing value” for those with gaps. She said: “You’ll only need to live for four years to claw back the extra contribution and you’ll be seriously in the money if you survive for another 10 or 20 years.”

However, she pointed out that there are a few things to watch out for and that paying voluntary national insurance contributions isn’t always suitable for everyone.

Ms Guy said: “It’s important to check the Government website to see if you have gaps in your national insurance record before you make additional contributions.”

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