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The DWP announced last week that the
Government is proposing an amendment to
the Pensions Bill which will allow some
people to make up to six additional years
of voluntary (Class 3) NI contributions in
addition to those permitted under existing
time limits. This will give these people
the opportunity to obtain a higher State
Pension than they might otherwise have
done.
These measures are intended, with
others already announced, to help the
people who are most likely to have
insufficient contributions to obtain the
full State Pension, that is, women and
those with caring responsibilities.
The measures already announced include:
- From 2010, the reduction in the
number of qualifying years required for
the full State Pension from 44 (men) and
39 (women) to 30 years for both.
- The introduction of weekly NI
credits to replace Home Responsibilities
Protection. These credits recognise
caring for children and disabled people
in the same way as paid work and will
count towards the State Basic and State
Second pensions.
- Compulsory pension contributions to
be made by employees aged 22 and over,
and their employers, on earnings above
about £5,000, from 2012 (subject to opt
out provisions).
The new proposals will only apply to
those people who have 20 qualifying years
of NI contributions (taking account of any
Home Responsibilities Protection) who
reach State Pension age between 6 April
2008 and 5 April 2015. This is men born
between 6 April 1943 and 5 April 1950 and
women born between 5 April 1948 and 5
October 1952.
Usually payment of Class 3 NI
contributions can be made only up to six
years after the year for which it is paid,
and payment may then be due at a higher
rate. These time limits have been extended
for the tax years 1996/97 to 2001/02
because people were not notified of
shortfalls in their NI contribution
records for those years (‘deficiency
notices’).
People who reached State Pension age
before 24 October 2004 (men born before 24
October 1939 and women born before 24
October 1944) have until 5 April 2010 to
pay additional contributions for those
years. Those who reach State Pension age
on or after 24 October 2004 have until 5
April 2009 to pay for those years. The
higher rate will not be due for the tax
years 1996/97 to 2001/02 if contributions
are paid within these time limits.
The existing rate of Class 3 NI
contributions is £8.10 per week (£421.20
pa). It has been announced that the rate
will be increased so that the new
arrangements will be cost neutral, taking
into account the fact that the number of
years needed to obtain a full State
Pension has decreased from 44 years for
men and 39 years for women to 30 years for
both.
As the rate is going to increase for
Class 3 contributions, it could be worth
reviewing past years now, with a view to
making contributions at the current rate
if paying additional contributions is
likely to be beneficial.
From 2010/11, someone who had only 18
qualifying years and who would therefore
have been retiring on a 60% pension (18/30
years) could potentially increase this to
a full pension, depending on
circumstances, by paying Class 3
contributions for the previous six years
under the existing rules and for six more
years under the new provisions. For
2008/09, the full basic State Pension is
£90.70 a week.
Even if the rate remains static (which
it should not), the increased pension
payable each year from 2010/11 as a result
of paying the extra twelve years’
contributions could be £1,886.56 (£90.70 x
12/30 x 52) for each year the pension is
paid.
The
Pensions Service website allows
individuals to obtain an estimate of their
future pension benefit, as well as
providing some useful calculation tools
for estimates. The only drawback is the
usual need to register with the Government
Gateway and wait for an activation code.
Practitioners may also wish to be
reminded that the State Pension age is
increasing to age 68 for both men and
women. For women it will initially rise
gradually from age 60 to 65 between 2010
to 2020, giving both sexes a common
retirement age of 65 from 6 April 2020.
The increase from 65 to 66 will be
phased in between April 2024 and April
2026, the increase from 66 to 67 will be
phased in between April 2034 and April
2036 and the increase from 67 to 68 will
be phased in between April 2044 and April
2046.
Further points to note:
- Class 3 contributions count for
Bereavement Benefits as well as State
Pension Entitlement.
- Paying the additional contributions
may not be the best course of action for
all prospective pensioners. Those
expecting very little retirement income
may be better off claiming
Pension Credit which guarantees an
income of at least £124.05 a week (if
single) and £189.35 a week (partners) to
those over 60.
Detailed provisions have not yet been
issued and anyone considering paying Class
3 contributions should take expert advice
before doing so. |
