Ask the Experts: What is the best way to make up for lost National Insurance Contributions?

Published by Patrick Connolly on 02 November 2017.
Last updated on 02 November 2017

Q

My wife has a six-year gap in her National Insurance Contributions (NICs) due to bringing up our children. It would cost us roughly £4,500 to buy NICs to make up these years.

Would it be more beneficial to put that £4,500 into a private pension or use it to buy the missing NICs? Which is the better investment option?

From:
JT/Ashington

A

The amount of state pension your wife will receive is based on her National Insurance Contributions' record. Assuming that she has not yet reached state pension age, she will need 10 qualifying years to receive any pension and 35 qualifying years to receive the full state pension. These qualifying years can be accumulated through NICs or credits.

Generally, a parent will receive NICs for children aged under 16 before 2010 and under 12 afterwards. There may also be other credits available where she can gain additional qualifying years. She needs to check this out (visit Gov.uk/national-insurance-credits).

If your wife has any gaps in her national insurance record, she may be able to make these up, and so benefit from a bigger state pension, by paying voluntary NICs. Before deciding whether to pay these she needs to make sure that there are gaps in her national insurance record for which payment can be made, that she understands how much she needs to pay, and the benefits she could then receive.

Your wife’s age is important. If she will earn further national insurance credits between now and her state pension age, then she may have a smaller state pension shortfall or perhaps none at all.

If your wife is eligible to make voluntary Class 3 NICs instead, these are, for many people, very good value. Each additional qualifying year that she tops up will mean that she will receive an additional 1/35th of the full state pension, or around £4.56 each week at current rates. Remember that this amount is index linked. So, for six years’ worth of top-ups, this should mean an extra state pension of about £1,422 each year.

This looks like a good deal for her total contribution of £4,500, as it effectively means that she would have received her money back after less than four years of receiving the state pension.

Patrick Connolly is a certified financial planner at Chase de Vere

Moneywise says: Your £4,500 would have to grow to £47,400 to produce 3% annual investment income of £1,422. To get that figure over 20 years seems unrealistic. If you assumed 5% growth a year, in 20 years you would have £11,939.

If she has been self-employed in the past, but below the small earnings exemption, it could be even more cost effective for her to make voluntary Class 2 NICs.

There are other considerations before making her decision. The first is the state of your wife’s health. If she is healthy and likely to live for a long time, then topping up the state pension becomes even more attractive. She should also consider her overall finances, including how much guaranteed income she has and will need in retirement, the flexibility she wants from her pensions and her own income tax position if she were to make a personal pension contribution, would she benefit from tax relief at 20%, 40% or 45%?

If your wife isn’t sure what to do, then she should take independent financial advice.

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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