Don't lose out on your state pension

It’s no secret that women get a pretty raw deal when it comes to the state pension. We need to make 39 qualifying years of national insurance contributions to be eligible for the full state pension - currently £87.30 a week - and 10 years of contributions to be eligible for just 25%. When you consider that women are more likely to take time out of work to bring up children and care for relatives, it's not surprising that just 30% of women qualify for the full basic state pension, compared with 85% of men.

“Women are the face of pension poverty in the UK,” says Steve Webb, Liberal Democrat MP for Avonmouth in Bristol and an active campaigner for women’s pension rights. “The sad thing is that many women don’t realise just how little of the state pension they are eligible for until they come to claim it – one of my constituents found that she was entitled to just 1p a week.”

The government has made some moves to help matters. It plans to cut the required number of years of NI contributions to 30 for men and women in April 2010, and in October 2008 it proposed an amendment to the Pensions Bill to allow people to buy up to an additional six years of voluntary NI contributions, over and above those permitted under the current time limits.

The proposals will apply to those who reach state pension age between 6 April 2008 and 5 April 2015 and who already have 20 qualifying years on their NI record.

James Purnell, secretary of state, said the move should mean that, by 2010, around 75% of women will be entitled to the full basic state pension, rising to over 90% by 2025.

This is not the first time the government has proposed allowing women to buy back missing years. In 2006, the government faced overwhelming opposition in the House of Lords when an amendment to the 2007 Pensions Bill was passed by 179 votes to 86.

The amendment, put forward by Baroness Hollis, was to give people the chance to buy back up to nine years of NI contributions, from any part of their working life. This would have potentially boosted retirement income for thousands of women and carers by increasing their chances of qualifying for the full state pension.

Yet in the week before Christmas 2007, pensions minister Mike O’Brien sneakily backtracked, announcing that there would be no change to the current rules.

Married Women’s Stamp

Millions of women who are currently at or nearing retirement age were offered the chance to pay the married women’s stamp between 1948 and 1977, which was basically a reduced rate of national insurance.

Yet those years when the stamp was paid do not count as ‘qualifying years’ towards the woman’s own pension, instead they get a pension worth 60% of their husband’s state pension – which explains why many women receive such a meagre amount.

The stamp was abolished in 1977 for women starting work, in recognition that it no longer reflected the changing relationships between men and women. However, there are thought to be thousands of women in low-paid or part-time work who are totally unaware of the fact that they’re not earning the right to their own state pension.

Take responsibility

Millions of women are not aware of gaps in their NI contributions and the impact on their eligibility for the state pension until it’s too late. However, until the government steps up its efforts, it’s up to women to take responsibility themselves. The first step, says Anna Sofat, an independent adviser at AJS Wealth Management, is to apply for a state pension forecast from the Department for Work and Pensions. “This is a really useful document and will show how many years of national insurance contributions you have accrued. It will also show any missing years, how many of these you can buy back and at what cost.”

Buyback options

Under current rules, women can buy back NI contributions for six preceding years, so for someone retiring it will be the six years leading up to state pension age. While this is helpful for some, for many women the gaps in their records come from earlier in their working life due to low-paid, part-time jobs or time spent as carers.

However, there are further buyback options for women who are not drawing a full state pension due to gaps in their NI contribution records.

It works like this. At the end of each year during your working life, HM Revenue and Customs checks if you have paid enough NI contributions for a full ‘qualifying year’ to count towards your state pension. If you haven’t, they’ll send you a ‘deficiency notice’ giving you the opportunity to fill the gap by paying voluntary Class 3 NI contributions.

However, during six years between 1996/1997 and 2001/2002, HMRC didn’t send these letters, which meant that a lot of people who retired during or after this period were not made aware of gaps for those years. The government subsequently set up a special scheme to make it easier for people to fill these gaps.

This is good news for those who missed out. Broadly speaking, if you have a gap in your NI contributions for one or more years between 1996/1997 and 2001/2002 – when you could have paid full-rate NI contributions if you wanted to – you can buy back any missing years.

The cost of buying back depends on which tax year you need to fill. It increases from £309.40 in 1996/1997 to £351 in 2001/2002, so a pretty small sum considering how much you stand to boost your pension by. Someone with just nine qualifying years of NI contributions, for example, won’t receive any state pension, while buying one year back will make them eligible for 25% – around 1,235 a year. If you think you’re eligible, call the HMRC Deficiency Notice hotline on 0845 302 1479.

If you were born between 6 April 1938 and 23 October 1944, particularly generous arrangements apply. In some cases, the government will simply pay you a cheque for the difference if the backdated pension is greater than the cost of the Class 3 contributions. If you think you come into this category, call the Pension Service Contribution helpline 0845 600 6669.

Your ability to buy back years and whether it will provide a worthwhile boost to your retirement income depends on a number of factors. These include your (and your husband’s) age; whether you’re drawing your own state pension or 60% of your husband’s; whether you paid or are paying the married women’s stamp, and whether you’re receiving any means-tested benefits. Due to this range of factors the action you need to take varies between women.

Personal provision

If, after assessing your state pension entitlement and buyback options, you find yourself still facing a cash-strapped retirement, you’ll need to boost your personal pension provision.

While this isn’t an option for women who are already retired, for those who are below retirement age it’s never too late – or too early.

Women should always contribute to their company pension scheme if they have access to one, as employers usually pay in on your behalf as well. It’s not unusual for older women to have a number of small company pension schemes scattered around. In this case, its generally advisable to consolidate them into one fund.

If your company doesn’t offer a pension or you’re self-employed, open a personal pension. This will offer a selection of funds in which to invest your contributions, but exactly which ones you choose will depend on your retirement age and attitude to risk.

It’s also important to review your pension regularly to ensure it’s on track to meet your goal retirement income, and whether you need to switch funds or increase your contributions.

Personal and company pension schemes receive tax-relief at your own marginal rate, which means the taxman boosts your contributions by 20% from 6 April if you’re a basic-rate taxpayer and 40% if you pay tax at the higher rate. Even if you don’t work, you can pay in and receive tax relief on £3,600 a year, so it’s worth paying in any income you have or asking your partner to contribute on your behalf.

If you receive a windfall, such as a work bonus or endowment payout, paying this into your pension will also go a long way to boosting your retirement pot.

The key to pension contributions is to try not to stop because it can be very difficult to start again.