Should I make Voluntary National Insurance Contributions? - UK State Pension 2

Should I make Voluntary National Insurance Contributions? - UK State Pension 2

by Richard Taylor on Jul 24, 2019

UK State Pension

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This is a question we are regularly asked and that we will now seek to answer, or at least help point you in the right direction. 

First of all, what are we talking about?

To receive the full UK state pension an individual needs 35 years of qualifying contributions (see our earlier blog). If you have less than 35 years and more than 10 (which is the minimum required to qualify for anything) then you will receive a pension proportional to the number of years you paid in.

When a person does not have the full 35 years, they may wish to pay voluntary contributions to boost their pension entitlement. People with some qualifying years, but less than 10, may want to make voluntary contributions to bring their contribution record up to the minimum of 10 years needed for a reduced pension.

Class 2 voluntary National Insurance contributions for 2019/20 are a mere £3 per week (£156 p.a.). Class 2 contributions are for those expats living and working abroad "but only if you worked in the UK immediately before leaving, and you’ve previously lived in the UK for at least 3 years in a row or paid at least 3 years of contributions"

Class 3 voluntary National Insurance contributions for 2019/20 are a pricier £15 per week (£780 p.a.) and are for those expats living abroad but not working "but only if at some point you’ve lived in the UK for at least 3 years in a row or paid at least 3 years of contributions"

https://www.gov.uk/voluntary-national-insurance-contributions/who-can-pay-voluntary-contributions

The first step is to check your national insurance record here: https://www.gov.uk/check-national-insurance-record. You should not make any voluntary contributions if you have more than 35 years already.

There is usually a time limit of 6 years, meaning voluntary contributions normally have to be paid within 6 years of the end of the tax year to which they relate. 

There are several ways to make class 3 contributions, including monthly direct debit: https://www.gov.uk/pay-voluntary-class-3-national-insurance

That’s all well and good, but should I bother?!?

Short answer – Yes, probably. 

Forgetting the inevitable American complication for a moment, in 2018/19 it will cost you £761 to “buy” a year. And in 2018/19 the full state pension is £168.60 per week, or £8,767 p.a. and to secure this you need 35 years. So, effectively each year = £250.49 per annum in state pension. 

So, paying £156 in 2018/19 will buy you a future income in today’s terms of £250 p.a. (this is inflation linked, so you will get the future equivalent of this). This is clearly a good deal! 

There is a caveat. All this could change by the time you reach state pension age. Governments are famously struggling to meet their retirement benefit obligations and there is every chance that things will change and benefits get watered down. That’s just a risk you have to bear in mind.  

Please note: if you are already receiving state pension benefits, then you are no longer permitted to make voluntary contributions.

Expat in America? Be aware of WEP

Here’s the rub for us in the USA – the “Windfall Elimination Provision” (WEP). I’m not going to go into great detail on this now (please see our previous blog post) but basically, if you have less than 30 years paying into Social Security and you qualify for a UK state pension then the SSA will reduce your Social Security benefits. 

And the fewer years you paid into social security, the more they will penalise you. 

As far as I am aware, you cannot avoid it. You will be penalised as soon as you become eligible for your state pension, not when you necessarily start drawing on it (how they know this I do not know, but perhaps they have some sort of information sharing agreement with HMRC).

If you are eligible for a UK state pension and have less than 30 years social security contributions you ARE going to be penalised under WEP regardless of the size of your UK state pension. And there seems to be nothing you can do about it, so you may as well maximise your UK state pension.

The WEP penalty is capped at a maximum of 50% of your US state pension. So by increasing your UK state pension entitlement you could increase your WEP penalty, but it is precisely because of this cap that you should probably make voluntary contributions.  

Here's another caveat. This can be exacerbated or reduced by the foreign exchange (FX) rate at the time you become eligible for your UK state pension. Again, this is something we covered in our WEP blog, which you can find here: https://www.taylortaylorusa.com/blog-01/social-security-windfall-elimination-provision-wep.

If you ever "contracted out" 

Check you National Insurance contributions record here: https://www.gov.uk/check-national-insurance-record

If you "opted out" when you were a member of UK company pension scheme then you may find that your contribution record does not match your accrued pension. This is because the shortfall will effectively be paid by the company pension scheme. You may be able to catch up and remove or reduce the shortfall. 

We have a client who had a full record (i.e. 35 "full" years contributions) and yet his accrued pension wasn't the maximum. When we queried this we were told that it was a result of having contracted out earlier in his career and that he could make it up to the maximum by paying several move years of class 2 contributions (see our blog on this topic). 

In conclusion:

Yes, you should probably make voluntary national insurance contributions, but your effort may be diluted by changes in the foreign exchange rate between the time of making the contributions and the time of drawing benefits. Also, it can be complicated by the fact you reside in America and will be in receipt of Social Security. If you are going to have over 30 years Social Security of contributions then you can ignore this, but if you won’t then do a little bit more homework before pulling the trigger. You’ll probably still be better off, but maybe not as much as you expected.

Read more about the author here: Richard Taylor

Taylor & Taylor Financial Services USA LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.