For most retirees, the State Pension forms the foundation block of retirement income planning. Anyone reaching State Pension age* after 6 April 2016 with full entitlement currently receives a guaranteed income of £185.15 per week (£9,627.80 pa). Furthermore, the “triple lock” guarantee** means this income increases each year by the higher of:
a) National average earnings
b) The Consumer Prices Index (CPI), or
c) 2.5%
In the current high inflationary and uncertain market environment, this guaranteed, index-linked income is an invaluable benefit, especially when individuals are increasingly relying on defined contribution pension funds in retirement. It is therefore essential that a client’s entitlement is reviewed, National Insurance (NI) credits are obtained where available and, where eligible, the option of voluntary contributions is discussed. This last point is especially important this year, for reasons I will cover below.
Eligibility and entitlement
To qualify for a full State Pension, an individual will need a complete NI record of 35 years. A minimum of 10 qualifying years is required to be entitled to any amount. Broadly speaking, an individual builds up their entitlement through:
- Working and paying National Insurance
- Receiving NI credits
- Paying voluntary NI contributions
Thankfully, obtaining a State Pension forecast and a copy of an individual’s NI record is quick and instantly available through the Government Gateway – who remembers the days when posting a BR19 application form was the only option? The forecast advises what State Pension has accumulated to date and, importantly, what additional NI credits will be required to receive the full entitlement.
Of course, if the individual already has a full entitlement, or is predicted to reach full entitlement (e.g., based on how long they plan to continue working and paying NI), then no further action is likely to be required. However, where a shortfall is predicted, then further consideration of the client’s available options is necessary. The same can be said for any client who has already reached State Pension age but who does not have full entitlement.
NI credits
Before considering making voluntary NI contributions, it is worth checking to see if any applicable NI credits are yet to be applied. A full list can be found on the government’s website.
One particular NI credit to consider is childcare. Where a parent has registered for Child Benefit for a child under age 12, NI credits are received automatically (whether the benefit is received or not). Therefore, even if it isn’t claimed (usually due to means testing), it’s important to register for Child Benefit in order to receive the NI credits.
It is also important to register the Child Benefit in the name of the parent that benefits from the credit (for example, if they ceased work to look after their child). If a mistake has been made, it’s possible to transfer these credits between parents.
Finally, since April 2011, its been possible for grandparents or other family members to receive NI credits if they are caring for a child under 12 while their parent (or main carer) is working. Known as Specified Adult Childcare credits, this can even include remote caring (such as telephone or online) after March 2020 if the normal caring arrangements had been affected by Covid. Retrospective claims can be made back to 2011.
Making voluntary contributions
Of course, individuals may be able to pay voluntary contributions to fill any gaps in their NI record. Usually, it’s only possible to pay for gaps for the previous six years. However, men born after 5 April 1951 and women born after 5 April 1953 have until 5 April 2023 to pay for any eligible gaps between the tax years April 2006 and April 2016. This effectively creates a window of 16 years. After 5 April 2023, this will revert to the usual six-year period.
The cost to fill in gaps in an NI record are up to £3.15 per week for class 2 contributions (£163.80 pa) or up to £15.85 per week for class 3 contributions (£824.20 pa). As each additional qualifying year equates to an extra £5.29 per week (£275.08 pa) of State Pension benefit, it’s easy to see the value of making these contributions. Voluntary payments can be made as a one of payment or by quarterly or monthly instalments.
Summary
The State Pension provides a guaranteed, index-linked income that forms the bedrock of retirement income. As such, it is essential that clients maximise this benefit and ensure that NI credits are received, where applicable. If a shortfall is predicted, it’s important to consider this before the end of the tax year, as many will have the ability to fill in any gaps in the NI record going right back to April 2006. This window of opportunity reduces to the previous six years from the end of this tax year.
* State Pension age is currently 66 and rises to 67 between 2026 and 2028. It will then rise again to 68 between 2044/46 (although a proposal has been made to bring these dates forward to between 2037 and 2039).
** The average earnings increase was temporarily suspended for 2022/23 following distortions to the earnings statistics.
If you need help or advice with your Investment planning please contact me, Claire Blake on 07767 308783 or claire@blakefinancialplanning.co.uk or https://bdfinancial.co.uk.
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