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Voluntary NI (Class 3)

Barbes
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Voluntary NI (Class 3)

#402144

Postby Barbes » April 6th, 2021, 10:14 pm

Mrs B is 55 and currently has 24 full qualifying years' worth of NI contributions. She's very unlikely to do paid work for the next 2-3 years although it is a possibility after that and, if so, she's much more likely to be self-employed. So if she does nothing it seems she'll be short of a year or two's NI contributions by the time SP age arrives. Is it worth her filling in some missing years now in particular 2015-16 which is pre the change to the new SP? She has tried unsuccessfully to contact the Future Pension Centre so hoping someone here can explain the pros / cons of filling in pre 2016 gap years especially. Thanks

mc2fool
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Re: Voluntary NI (Class 3)

#402147

Postby mc2fool » April 6th, 2021, 10:45 pm

The very first thing to do is for her to get a state pension forecast, start here: https://www.gov.uk/check-state-pension.

If she signs up for the online service it'll show her NI record as well. The calculation as to whether it's worth filling past gaps, and in particular pre 2016 ones, can be complicated. Once she's got access post here the following and we'll be able to figure it out. What's needed is:

The amount it says she'll get from her record up to now.
The Contracted Out Pension Equivalent (COPE) amount (she'll only have this if she was ever contracted out of SERPS/S2P).
The number of full qualifying NI years she has up to and including 2015-16
The number of full qualifying NI years she has from 2016-17 onward, inclusive.
The years that she doesn't have a full qualifying NI year for from 2006-7 onward (it's too late for any gaps before that),
and if any of those are part filled, the cost to fill them (click on View Details against years which aren't marked as full).

BTW, class 2 voluntary NICs are much cheaper than class 3 -- for this year £158.60 vs £800.80 -- so if in the years going forward when she's not working she declares herself self-employed and does a few hundred quids worth of, say, baby sitting or gardening or whatever, she can pay class 2 for that year instead of class 3.

EssDeeAitch
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Re: Voluntary NI (Class 3)

#402176

Postby EssDeeAitch » April 7th, 2021, 7:23 am

My experience of trying to deal with the Future Pensions Department have been a total waste of time.

It is easy to determine how much you can buy back and the mechanism for paying this money in - the link provided my mc2fool above is indeed the place to start.

It has been impossible to verify if this additional payment will result in an increased state pension.

After working out how many years we wanted to buy back I called the NI department to arrange payment and was given the necessary bank account details and the 16 (I seem to think) reference number to allocate to the payment. So far so good. Then the person from NI said "make sure to contact the Future Pensions Department to confirm that this payment will result in you getting a higher state pension" she added helpfully that "once paid in you will not be able to get it back".

I called the FPD and got an automated "this line is no longer in service" message. I looked for and found a second number which delivered the same result. I called the NI department and they gave me a third number which again, delivered the same message. I delved deep and found an on-line form and filled that in but no response. Then in the first week of December I wrote to them but no response from that either.

Don't bother. Put your money into something else because trying to deal with the FPD results in madness.

swill453
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Re: Voluntary NI (Class 3)

#402192

Postby swill453 » April 7th, 2021, 9:03 am

EssDeeAitch wrote:It is easy to determine how much you can buy back and the mechanism for paying this money in - the link provided my mc2fool above is indeed the place to start.

It has been impossible to verify if this additional payment will result in an increased state pension.

I think the best practice is to:

- log in to see your NI record and pension estimate figures online.
- post those figures here and some very clever people will tell you the implications of buying extra years.

I'm simply not aware of any better way of doing this.

Scott.

EssDeeAitch
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Re: Voluntary NI (Class 3)

#402195

Postby EssDeeAitch » April 7th, 2021, 9:07 am

swill453 wrote:
EssDeeAitch wrote:It is easy to determine how much you can buy back and the mechanism for paying this money in - the link provided my mc2fool above is indeed the place to start.

It has been impossible to verify if this additional payment will result in an increased state pension.

I think the best practice is to:

- log in to see your NI record and pension estimate figures online.
- post those figures here and some very clever people will tell you the implications of buying extra years.

I'm simply not aware of any better way of doing this.

Scott.


You may well be correct but the issue is the fact that I cannot get any assurance from the appropriate authorities that said payment will result in an increased state pension. For me, that ship has sailed but I thank you for the suggestion.

mc2fool
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Re: Voluntary NI (Class 3)

#402312

Postby mc2fool » April 7th, 2021, 2:10 pm

Barbes wrote:...hoping someone here can explain the pros / cons of filling in pre 2016 gap years especially. Thanks

P.S. As we've just started a new tax year, and the online system has been known to take some time to update to the new tax year, when you post The amount it says she'll get from her record up to now please include the date it is showing that record is up to, and also post the amounts, date and number given in "the most you can get" section, as that'll help figure what years it relates to.

Barbes
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Re: Voluntary NI (Class 3)

#402340

Postby Barbes » April 7th, 2021, 3:25 pm

Thanks mc2fool, here's what we have:

1) Current forecast is £121.87
2) COPE is £7.43/wk
3) 23 full years to 2015-16
4) 1 full year since 2016-17 (2020-21 - not recorded yet but we know to be the case)
5) Part full years are 2014-15 (£616); 15-16 (£492.80); 16-17 (£800.80); 17-18 (£800.80); 18-19(£800.80); 19-20 (£435)

Thanks for your help - much appreciated.

Barbes
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Re: Voluntary NI (Class 3)

#402342

Postby Barbes » April 7th, 2021, 3:35 pm

mc2fool wrote:
Barbes wrote:...hoping someone here can explain the pros / cons of filling in pre 2016 gap years especially. Thanks

P.S. As we've just started a new tax year, and the online system has been known to take some time to update to the new tax year, when you post The amount it says she'll get from her record up to now please include the date it is showing that record is up to, and also post the amounts, date and number given in "the most you can get" section, as that'll help figure what years it relates to.


Sorry missed this....

1) the estimate is dated 5/4/2020
2) the most is £175.20 if 11 further full years are made before 5/4/2033.

Thanks again.

mc2fool
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Re: Voluntary NI (Class 3)

#402651

Postby mc2fool » April 8th, 2021, 4:30 pm

Barbes wrote:1) Current forecast is £121.87
2) COPE is £7.43/wk
3) 23 full years to 2015-16
4) 1 full year since 2016-17 (2020-21 - not recorded yet but we know to be the case)
5) Part full years are 2014-15 (£616); 15-16 (£492.80); 16-17 (£800.80); 17-18 (£800.80); 18-19(£800.80); 19-20 (£435)

Barbes wrote:1) the estimate is dated 5/4/2020
2) the most is £175.20 if 11 further full years are made before 5/4/2033.

Ok, well the second part tells us that they have yet to update the site for 2021/22 figures, and confirms that she will be able to get a full new state pension, although as we'll see she has a variety of paths to that. So, are you sitting comfortably? :D

The transition from the old to new state pension systems for folks that have qualifying years before 6-Apr-2016 but will be retiring on or after that date is implemented by calculating a "starting amount" for them at that date. This is basically the higher of how much they'd have got with the old system if they'd retired at that date and how much they'd have got under the new system less a deduction for having been contracted out.

Now, the twist in calculating this is that of the figures that you have, the headline ones (£121.87 & £175.20) are for 2020/21 but the COPE figure is as of 6-Apr-2016. We could increase that to take into account the increases in state pension since then before sticking it into the calculation, but I'm going to do it instead by using all the 2016/17 numbers, 'cos that's what DWP do and if you ever have to talk to them about the starting amount it'll be the as-of 6-Apr-2016 figures they'll be quoting.

At 6-Apr-2016 the full Basic State Pension (old system) was £119.30pw after 30 years of contributions, which is £3.98pw for each year.
At 6-Apr-2016 the full New State Pension was £155.65pw after 35 years of contributions, which is £4.45pw for each year.

In 2020/21 the full New State Pension was £175.20pw after 35 years of contributions, which is £5.01pw for each year.

MrsB's new system pension figure to go into the comparison is 23 * £155.65 / 35 = £102.28, less COPE of £7.34 = £94.94.

Now, as well as the BSP in the old system people also potentially had some Additional State Pension, and to calculate her old system figure for the comparison we need to know how much ASP she would have got at 6-Apr-2016, but we don't have that (DWP can tell you if you ask), however we can infer it.

So, we start off by calculating her BSP figure, which is simply 23 * £119.30 / 30 = £91.46.

We know that her current forecast is £121.87, and that that figure doesn't include any post-2016 full qualifying years, so it is in effect simply the 2016 starting amount revalued to 2020/21. So, let's deflate it back to 2016 figures by £121.87 * £155.65 / £175.20 = £108.30.

As £108.30 is higher than the 2016 NSP figure of £94.94, that means that her "starting amount" was based on the old system, and included £108.30 - £91.46 BSP = £16.84 of Additional State Pension.

Ok, so we now know that at 6-Apr-2016 she had accumulated £94.94 under the new system and £108.30 under the old. It's all down hill from now. :D

If she fills 2014-15 and/or 2015-16 that'll add £3.98 for each year to the old figure and £4.45 for each year to the new, and if you try that you'll see that her 2016 starting amount will still be higher under the old system for both cases, increasing to £112.28 for filling one of those years and £116.25 for filling both of them.

Let's now reflate those to 2020/21 figures, by multiplying both by £175.20 / £155.65, getting us £126.38 and £130.85 respectively, which is what the forecast would have said (instead of £121.87) if she'd already filled one or both of those pre-2016 years.

Now, in 2020/21 figures, adding further years from 2016 onward adds £5.01 per year filled, and she can keep adding those until she reaches the full new state pension amount, or she reaches state pension age, whichever comes first.

This is where we can now see that she has a variety of paths to getting a full new state pension. She could just simply ignore the past and fill each year going forward from now, adding the next 10 years to the 2020-21 one she's already got, and that'd be the best move if she thinks she'll be working for that whole time, as there's no point in paying for voluntary NICs for the past if the involuntary ones she will be paying going forward will get her to the full amount anyway.

OTOH, if she thinks she won't be working that much, she can fill some/all of the past gaps to reduce the number of years going forward from now which she will have to make up, and I'll leave it as an exercise for you & her, and other readers, to figure out the cost-benefit of filling the partly filled and empty years she has available ... :D

Let me know if I've confused the heck out of you! ;)

P.S. The full new state pension for 2021/22 is £179.60, should you want to reflate the figures to the current tax year. :)

Barbes
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Re: Voluntary NI (Class 3)

#402735

Postby Barbes » April 8th, 2021, 8:33 pm

Phew - that took a bit of reading and then re-reading but thank you - this is hugely appreciated. On the face of it the payback period is clearly good but won't start for a dozen years so it would be part investment part bet. Given Mrs B won't work all 11 of the next 12 years to reach SP age fully contributed, there's a question of whether it's worth filling in old years whilst she still can. If I understand the maths filling in 14-15 now would add £4.51/wk but filling a post 2016 year would add £5.01/wk. However, is that simply because both old years are part filled or is there some other actuarial black art happening due to the old / new SP thing?

At the moment it feels best to do nothing just now and fill in years gradually whilst keeping an eye out in the meantime for further gov't fiddling. Are we on the right track here? Or am I missing anything?

mc2fool
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Re: Voluntary NI (Class 3)

#402753

Postby mc2fool » April 8th, 2021, 9:51 pm

Barbes wrote:Phew - that took a bit of reading and then re-reading but thank you - this is hugely appreciated. On the face of it the payback period is clearly good but won't start for a dozen years so it would be part investment part bet. Given Mrs B won't work all 11 of the next 12 years to reach SP age fully contributed, there's a question of whether it's worth filling in old years whilst she still can. If I understand the maths filling in 14-15 now would add £4.51/wk but filling a post 2016 year would add £5.01/wk. However, is that simply because both old years are part filled or is there some other actuarial black art happening due to the old / new SP thing?

No, it's because, as I explained, her 2016 "starting amount" is based on the old system, that being higher than it would be under the new system.

Adding another pre-2016 year boosts both old and new figures, the old by the old amount of (in 2020/21 terms) £4.51pw and the new by the new amount of £5.01pw, however despite that the old system total is still higher than the new system total, so the effect is to increase the pension by £4.51pw.

The payback period from even class 3 NICs is really very very good. For £880.80 to buy a full post 2016 year she'll boost her pension by £260.52 a year in today's figures. In 12 years time it'll be even more 'cos the state pension increases each year.

For the part filled years it's even better; for 2014/15 and 15/16 she'll get an extra £234.52 a year for a cost of £616 and £492.80 respectively, and for 2019/20 she'll get the extra £260.52 a year for a cost of just £435!

Barbes wrote:At the moment it feels best to do nothing just now and fill in years gradually whilst keeping an eye out in the meantime for further gov't fiddling. Are we on the right track here? Or am I missing anything?

There's no need to rush as you (exceptionally) have until 5-Apr-2023 to pay the pre 2016 ones, should you decide you want to. It then changes to a 6 year deadline, so you'll also have up to 5-Apr-2023 to pay the 2016/17 one, up to 5-Apr-2024 for the 2017/18 one, etc. Note though that the cost increases from the original cost for the year being paid to the current year's cost after 2 years for class 3 and 1 year for class 2.

As I noted much earlier on, class 2 (self employed) voluntary NICs are much cheaper than class 3 -- £158.60 this year to get an extra £260.52 a year on retirement is really unbeatable! -- and I think what I'd do in her case is nothing about the past but going forward for any/every year where she's not employed, register herself as self-employed doing, say, baby sitting or ebay trading or gardening or whatever, keeping earnings under £1000pa, as the first £1000 of self-employed earnings is tax free, and then pay the £158.60pa voluntary class 2 NICs for those years.

The only disadvantage of that is that she'll have to do a self assessment for those years, and the risk is that the govt. revisits its a few years ago mooted but since scrapped plan to abolish class 2 NICs, although in that case you'll just be where you started on this, making class 3 NICs instead, which as I say, are still a pretty good deal.

Barbes
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Re: Voluntary NI (Class 3)

#403041

Postby Barbes » April 9th, 2021, 10:22 pm

Great thanks for that - it all makes sense now and if the Lemon Fool ran a virtual pub I'd stand you one at least! Self-employment is a realistic (and genuine) plan in a couple of years time so we will hold back the horses for now.

Thanks again.

mc2fool
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Re: Voluntary NI (Class 3)

#403065

Postby mc2fool » April 9th, 2021, 11:54 pm

Barbes wrote:Great thanks for that - it all makes sense now and if the Lemon Fool ran a virtual pub I'd stand you one at least! Self-employment is a realistic (and genuine) plan in a couple of years time so we will hold back the horses for now.

Thanks again.

Lemon Fool does run a virtual pub, it's called Beerpig's Snug. Unfortunately the beer's virtual too. :lol:

I suggest you stick an alarm in your calendar for the start of 2023, when the first deadline will be looming, to at least review Mrs B's situation then before some of the options lapse.


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