First up, the benefits of the current system require five additional years of National Insurance contributions (NICs) to achieve the maximum benefit — that means 35 years of work instead of 30.
The good news is that the government has been allowing men born after 1951 and women born after 1953 (which pretty much covers all working-age people and some) to make up any contribution years they may have missed going back to 2006. This deal, however, is set to expire in April. It is indeed an excellent offer. Yet due to the complexity of the system and constant tinkering with the rules, many are deterred from taking advantage. Some aren’t even aware they are missing out.
For most people, catching up involves making so-called Class 3 voluntary NICs. Currently, these cost £824.20 for each year missed. To see what a great deal this is, consider the rather extreme example of someone who has not made any NICs at all since 2006. This person would be eligible to top up 16 years in one go at a cost of a little more than £13,000. In return, their pension entitlement would rise by more than £4,400 a year in today’s money. Given that the value of the state pension currently rises in line with the higher of average earnings, inflation or 2.5% each year — a formula known as the triple lock — it would likely take less than three years in retirement to recoup the cost of the additional NICs.
So the economic case for topping up is compelling. Yet only 44% of pensioners who retired under the new scheme between 2016 and 2019 received the full benefit, according to Department for Work and Pensions (DWP) data. This compares with 65% under the old scheme.
What is preventing people from maxing out their contributions in the first place?
Perhaps the greatest factor in people missing out is the constant tinkering with the state retirement age (SRA) — and then the changes to the changes. Prior to 2010, the SRA for men was 65 but only 60 for women. The process of equalizing these ages for men and women later confusingly became part of raising SRAs for everyone to 66. A move to 67 is imminent, but even before that has happened, the plan to move to 68 is about to be accelerated by more than a decade.
These ever-changing timescales have added to the confusion surrounding the state pension. Younger generations are losing confidence in the system, fearing further increases in the SRA and a watering down of benefits.
The alterations have also been poorly communicated. This resulted in as many as 3.8 million women born in the 1950s suddenly having to fund an unexpected gap of several years before they could claim their state pension. Many of these women will also have NIC shortfalls. Filling them might soften the blow, although it will still leave a gap when they receive no state pension.
The process of topping up NICs is relatively straightforward. It involves going online to check your state pension forecast and NI contribution history and then contacting HMRC to arrange payment. You can get the ball rolling here.
But the calculation of your entitlement is anything but simple. There are numerous reasons why your online HMRC state pension forecast might be less than you expect.
One of the most common is that you may have opted out of something called the additional state pension, which was related to your earnings and was available between 1978 and 2002. For a period, it was possible to “contract out” of this additional element — meaning that instead of contributing to your state pension, the money was paid into your private pension. For many, it meant that any year in which they were contracted out didn’t fully count towards the state pension. They will have extra cash in their private pensions, but they won’t have the security of a guaranteed, inflation-linked income that the state pension provides.
Even if your state pension forecast is accurate, wrinkles in the calculation mean that many low-income couples stand to lose valuable benefits under the new system. The DWP has estimated that by next year as many as 60,000 couples will lose valuable pension credits. This occurs most frequently when a married couple has a significant age gap.
Another issue is that it is very difficult even for a well-informed layperson to spot mistakes in the complex algorithms. As I write, the government is in the process of attempting to sort out an issue that has resulted in more than 230,000 women, who retired prior to April 2016, being underpaid. Women over age 80 and those who divorced after reaching the state retirement age are especially vulnerable, together with widows. Some will eventually have their shortfall repaid automatically, though many will remain unaware of their loss.
The rule of thumb here is that if you are receiving less than the maximum entitlement, don’t be afraid to ask for it to be explained to you. In my experience, you may even be pleasantly surprised at how helpful staffers are. With the charity Age UK estimating that state pension underpayments are likely to total £3 billion over the next six years, it is definitely worth checking your entitlement on a regular basis and that the information it is based upon is correct. Many of the problems have only been unearthed by people asking raising questions.
Too many retirees fail to receive a full state pension. Any deal to catch up — such as the deal that ends this April — should be jumped on before it’s gone.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.
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