Improvements announced to State Pension Scheme
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.
To find out more about how we can help you, please contact Simon Coles & Co, London Chartered Accountants.
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