Pre-Budget "cheated" pensioners
The pre-Budget report will make it harder for pensioners to buy missing national insurance (NI) contributions, according to pensions experts.
Back in October, the government backtracked on an earlier U-turn and proposed allowing women aged between 53 and 60 to buy back a further six years of NI contributions (on top of the current six years allowance) into their pension pots. The move should mean that by 2010, 75% of women will qualify for a full basic state pension compared to just 35% today and will give them an extra £18 a week.
Currently, people can only make up six years of NI contributions but, under the planned changes, those retiring between April 2008 and 2015 will be entitled to buy a total of 12 years’ worth.
However, Britain’s biggest pensioner organisation, the National Pensioners Convention (NPC), says buried details in the pre-Budget report will make it harder for people to buy back missing NI contributions. These reveal that cost of buying back a lost year’s worth of NI will rise in April 2009 from £420 to £626.
Dot Gibson, vice president of the NPC, says: “Up to five million existing women pensioners already fail to get a full state pension because they spent years raising children, caring for relatives or working part-time. Many of these women are now living in poverty and would have found it hard enough to buy back under the old rules, let alone now the cost has risen by almost 45%.
“The government has conned millions of older women by telling them they can buy back their lost pension, but failing to tell them exactly how much it is going to cost.”
Gibson adds that, before this increase, only one in 10 women were expected to take up the offer. The increased cost is likely to put even more women off.
Financial advisory firm Hargreaves Lansdown says people nearing retirement and planning to buy back missing NI contributions should act betore the end of the tax year to avoid having to pay more.
Laith Khalaf, pensions analyst at Hargreaves Lansdown, says:"If you are thinking about buying back years of state pension, then for most people it makes sense to do so before April 2009.
"The deal is not suitable for everyone, in particular younger people, married women and those who stand to fall into the means-testing trap may see no or little benefit from buying back extra years."
Khalaf says that, if you reach state pension age after 2010, then there are several points to bear in mind before opting to buy back NI contributions.
* From 2010 you will only need 30 years of NI contributions to qualify for a full basic state pension so you are less likely to need extra years.
* As you still have several years of potential NI contributions ahead of you, you are more likely to acquire enough to qualify for the full basic state pension.
* If you put the money away now the interest earned on it may offset the increased cost of buying a year in the future.
Other circumstances when it may not pay to buy back NI:
* You already have a full basic state pension
* You stand to get means tested pension credit when you retire
* You are a number of years from retirement and will probably achieve a full entitlement by the time you reach state pension age
* Even after you have bought the years you do not exceed the state pension you receive in virtue of your spouse
* Even after you bought the years you still will not have the minimum required to qualify for any state pension
* Women should also bear in mind that up to a point they get credited with NI contributions in years when they are claiming child benefit and can build up an entitlement that way. You can get a state pension forecast on the Pension Service website or by calling 0845 3000 168.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.