The number of years of National Insurance contributions needed to receive the full Basic State Pension has been reduced this year from 39 to 30, increasing the number of people entitled to the full Basic State Pension of £97.65 per week.

However, for those who may not have the 30 complete years of NI contributions to the state pension needed, the government is offering the chance to ’buy back time’ by paying up or completing additional years of NI contributions. You do not have to be working to avail of this deal – those already in retirement can also participate.

This offers workers with a broken work pattern a golden opportunity to ‘patch the holes’ in their National Insurance contributions record and maximise their income from their pension.

These late payments to the government pension are known as Class 3 Contributions, and will increase your Basic State Pension entitlements as part of your general pension planning.

People who have had broken working patterns may have missed out on some years of NI contributions in the past, and would particularly benefit from making the Class 3 Contributions needed to boost their government pensions. Others who would benefit include those who were unemployed but did not claim benefits,  those who earned less than the lower earnings limit for NI contributions, i.e. £97 per week, or those who lived abroad.

What is the cost of topping up the Basic State Pension?

Buying back years of NI contributions costs £626.60 per year, or £12.05 for each week if you are completing a year.

A special deal applies to those buying back a year from the previous two years i.e. someone in 2010 buying back government pension contributions for 2009 or 2008. These apply, not at today’s rate, but at the rate that applied in that year. Because the rates were increased in 2009, you can still buy for 2008/09 at a lower rate of £8.10 per week.

Payments to buy back lost NI years must be made within 6 years, so that in 2010 contributions can be made for years back to 2004/05. A special exemption also applies to those with 20 years of NI contributions, who will reach the state retirement age, i.e. the age at which they can draw the Basic State Pension, between April 6 2008 and April 5 2015 – this group can buy an additional 6 years of NI contributions for any years back to 1975/76.

Today, a woman turning 60 who has not paid NI contributions for a full 39 years will not qualify for the full basic state pension of £95 per week, instead she will qualify for only three-quarters of the basic state pension, giving her around £75 per week.

From April 6^th, paying NI contributions for just 30 years gives a woman an entitlement to the full basic state pension, which by then will be £97 per week.

This threshold means that a woman turning 60 this month will receive £10,400 less in her pension over the next ten years, compared to her friend who turns 60 after 6^th April.

This difference is even starker if she lives to enjoy the full life expectancy for a woman today, which is 81 years old.

In that case she will have received over £20,000 less in basic state pension payments, when compared to her slightly younger friend.

Similar changes apply to men, but women are expected to be most affected as they are most likely to have taken time out during their careers, thus reducing their total number of qualifying years of NI contributions for the basic state pension.

This ‘cliff-edge’ situation that occurs on April 6^th has been called a form of ‘pensions apartheid’ by campaigners, who maintain that the new arrangements should have been phased in.

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 The basic State Pension was linked to earnings once before, in the 1970s, but was switched to link to prices through the Retail Price Index in 1980. As earnings generally increase faster than inflation, the long-term effect of this has been to reduce the State Pension to its current level of £95.25 per week, or £4,953 per year.

Experts indicate that restoring the link to earnings could add up to £11 per week to the value of the pension.

 At the same time, a reduction in the required number of years of National Insurance Contributions will make the basic State Pension available to a greater portion of the workforce.

 Today, men need 44 and women 39 years of contributions, to qualify for the basic State Pension. This will fall to 30 years, for both genders, from April 2010.

 Carers and Mothers

 Government also plans to address the disadvantages that faced carers and full-time mums, who missed out on valuable years of National Insurance contributions due to being absent from the workforce.

 From April 2010, full-time carers and mothers will get full credit for the years spent, so that they will no longer be disadvantaged with regard to the basic State Pension.

 Access to these ‘National Insurance contribution credits’ will be available to parents with a dependent child under 12, approved foster carers, and those caring at least 20 hours per week for severely disabled people.

It is now possible to render yourself eligible again, by ’plugging the gaps’ in your National Insurance record.

Since April 2009, you can ‘buy back’ up to six years of additional National Insurance contributions for years you missed since 1975.

This applies to people who reach(ed) State Pension age between April 6th 2008 and April 5th 2015, and already have 20 years of qualifying NI contributions. These years can include Home Responsibilities Protection.

Interested parties wishing to check if they have any gaps in their NI contributions can do so by contacting the Pension Service. You have six years from the date you reach retirement age to pay, but there is no guarantee that any resulting entitlements will be backdated.

If you are considering ‘filling in the gaps’ in your National Insurance record by making some voluntary contributions, bear in mind that this could result in an overall reduction in your retirement income, if it reduces your entitlement to Pension Credit, which is a means-tested benefit.

However, this £34,840 threshold has now increased to £43,888, so that there is an additional £9,048 where national insurance takes away 11% of your earnings. That adds an additional £995 to your annual national insurance contribution. 

In the face of this increase, it’s really worthwhile for those in this salary bracket to look at streamlining their retirement planning, by considering a “salary sacrifice”. 

This is where an employee takes a voluntary reduction in salary to reduce their exposure to National Insurance payments. They request instead that their employer pay more into their pension. 

Not only have they reduced their National Insurance contribution, and increased their pension contribution, but their nett salary remains unchanged. 

For example, a man earning a salary of £41,000 can request his employer to reduce his salary by £3,000. Then he can take the national insurance savings that he and his employer are making, and, with his employer’s agreement, add them into his pension. 

Employers are quite open to such a suggestion, since they are simply redirecting cash into the employee’s pension that they would have had to pay to the government in any case.