The State Pension NI Fiasco?

Last week This Is Money ran an article titled: “Officials admit they can’t say if your state pension top-up will work and tell savers to seek expensive financial advice” (link)

This follows several earlier articles on the “State Pension Fiasco”:

  • Couple who lost £7k topping up their state pensions finally win a ‘goodwill’ refund as HMRC stands by its baffling system (link)
  • The state pension top-up fiasco: Savers are paying to boost their incomes only to find payouts don’t rise and they can’t get a refund (link)
  • I’m being deprived of £155 full state pension despite paying NI for 45 years because I was ‘contracted out’ behind my back! Steve Webb replies (link)

The articles are all high on anger but less clear on what the problem is. In part though, that’s because the problem is quite complicated and not easy to explain. The thread that runs through each of these pieces is that the Government has done a very poor job of communicating the 2016 changes to the state pension (the “single-tier” or “new” state pension).

In this piece I’m going to try my best to explain what’s going on with the new state pension, why things are going and what you can do about it. Before all that, let’s take a potted history of the UK State Pension.

6 April 2016: the day the earth stood still…

On 6 April 2016 the Government brought in the New State Pension (NSP). The key distinguishing element of the NSP is that it is single-tier – it has only one element – for 2018/19 it pays £164.35 per week. There are no other payments or anything like that – just one amount. The concept behind it was two-fold: (i) the old pension system was convoluted, a single-tier pension is much simpler; and (ii) the new system paid the same to everyone, the state wasn’t going to pay out extra cash to “rich pensioners”. But to understand the NSP, we need to look at what it replaced.

The Old State Pension (pre-6 April 2016)

If you reached State Pension Age (SPA) before 6 April 2016 (men over 65, women over 63), you get the Old State Pension (OSP). There were two elements to it: (i) the Basic State Pension (BSP); and (ii) the Additional State Pension (ASP). To get the full BSP you needed 30 years of National Insurance Contributions (NICs) or credits. For 2018/19 the full BSP is £125.95. If you had less than 30 years then the amount was scaled down commensurate with the number of years you had accrued. So far so easy. The ASP was where things started to get complicated. First, we need to go back to 1961…

State Graduated Pension Scheme

In 1961 the government introduced the State Graduated Pension Scheme (SGPS). Designed, to reflect that some people had paid additional NICs compared to the self-employed (through the fixed rate Class 2 contribution, note Class 4 doesn’t provide entitlement to any benefits, it’s only Class 2 that counts). However, most occupational schemes contracted out of this – by paying the value of the ‘additional’ NICs out of the occupational scheme instead of paying it to the Government. In effect, very few people accrued under the SGPS.


In 1978 something that might be a bit more familiar came along, the State Earnings Related Pension Scheme (SERPS). To cut it short, if you earned above certain limits you accrued an extra pensions entitlement to reflect that you were making more NICs. You would accrue the entitlement at a 25% rate, what’s more only your best (i.e. highest paying) 20 years counted. It sounds too good to be true, and it was. The accrual rate was too generous and in 1988 the accrual rate for those retiring post-2000 was cut to 20% and career average earnings used. Again, many people were contracted out of SERPS.


As you may have guessed, the Government again changed its mind. In 2002 they replaced SERPS with the State Second Pension (S2P). The aim of the S2P was to widen the scope of people who could get an additional entitlement and to skew benefits away from high-earners to low and medium-earners. In short, the Government created a “three-band system”: increasing accrual rates for lower earners to 40% (between certain limits) and lowering them to 10% for “middle-earners”, with the rate for higher earners, 20%, the same. The Government made a commitment that nobody reaching SPA before 6 April 2009 would be worse-off under the new system compared to SERPS. So those people received an additional accrual top-up (this principle pops up again later and is one of the causes of the current New State Pension issues).

It wasn’t long before the Government realised they once again set accrual rates too high. In 2010, the Government scraped the “three-band” system for a less generous “two-band system”. The middle and upper bands were combined and both accrued at 10%.

This lasted only 2 years until April 2012 when the Government changed the lower band to a fixed rate, and generally speaking, less generous accrual. The Government also stopped contracting out for those with a DC scheme, so only DB members could keep contracting out.

As you can probably surmise, working out your S2P requires a brain the size of two watermelons. Firstly, you split your earnings across the bands and revalue them to the tax year prior to reaching State Pension Age (SPA). You then multiply the earnings by the relevant accrual rate (including any adjustments required for SERPS). You then divide by the number of years in your working life (from age 16 to SPA).

Pension Credit

There was one final element of the Old State Pension. Under the OSP there were also State Pension Credits. In short, these were designed so that people would have a minimum floor for their State Pension (i.e. wouldn’t have a below-poverty level pension). There were two types of credit:

  1. Guarantee Credit – If you have income below £163 (single) or £248.80 (couples) and savings under £10,000 (with a few other conditions) the Government tops you up to £163/£248.80 (2018/19 figures).
  2. Savings Credit – This is a credit for those that built up savings for retirement. In effect if your income is higher than a certain level, the Government tops you up. Because the full-rate New State Pension was set above the maximum Pension + Savings Credit, the Savings Credit became no longer relevant for people reaching SPA after 6 April 2016.

To take-away, there were things in place to make sure you got a certain level of pension income in retirement.

In Summary

If there are two important themes to take away from the OSP it is this:

  • It was very complicated; and
  • Continually chopped and changed, but with a commitment that those under the SERP/old system wouldn’t lose out under the new/S2P system.

Back to the NSP

It wasn’t just the amounts and the simplification that changed on 6 April 2016. Several other rules changed, many of which caused problems:

  1. You need to have at least 10 years NICs to get anything (up from 1 year)
  2. To get the full £164.35 you now need 35 years NICs (up from 30)
  3. From 6 April 2016 you can’t claim a SP based on a spouse’s NIC record.
  4. All NIC classes (employed vs self-employed) accrue at the same rate.
  5. The Government set the principle that you couldn’t have a lower pension than your accrued entitlement to the ASP/SERPS/S2P as at April 2016.
  6. Contracting out for DB schemes ended (it had already ended for DC schemes)

Problem 1: Not all NICs are equal

Numbers 1, 2 and 3 meant that some people suddenly found themselves “short” of the NICs needed to get the new full pension. To help with that, you could make voluntary contributions. However, there are two types of voluntary NICs. Class 3 – which allows you to buy a higher level of the old BSP (and now New State Pension) and Class 3A – which bought old Additional State Pension (until 5 April 2017). These bought different things and it is entirely dependent on your contribution record whether you needed to buy Class 3 or Class 3A or both.

Secondly, and most importantly, Class 3 NICs for years after 6 April 2016 contribute to the NSP, increasing the rate by 1/35th. If you made Class 3 NICs for years before 6 April 2016 these could count towards your old BSP and not towards the NSP, and could therefore be pointless.

Problem 2: You can’t be worse off in the new system than you were under the old system

In a way this is a nice problem to have, but it means that to calculate your entitlement you need to calculate a hypothetical entitlement under the old system. I’m not being facetious here but: THIS CALCULATION IS INCREDIBLY COMPLICATED.

For those under State Pension Age at 6 April 2016, you first calculate what’s called the Starting Amount, a hypothetical based pension which is the higher of:

  1. What you would get under the old State Pension (BSP plus ASP); and
  2. What you would get if the NSP existed from when you started work (age 16).

If this amount is lower than the full NSP you can contribute Class 3 NICs from between 6 April 2016 and SPA to get the full NSP. Voluntary contributions for years pre April 2016 may or may not increase your pension depending on whether the Starting Amount is based on the Old System (1) or the New System (2). If your Starting Amount is based on the Old System and you have 30 NIC years then contributions for years before 6 April 2016 will not increase your pension.

If the amount is higher than the NSP then the difference between this figure and the NSP is called the Protected Payment. The Protected Payment is paid on top of the NSP, it increases by CPI every year and most importantly any further NIC years post 6 April 2016 will not add any more to your State Pension.

If you’ve followed all that, then you’re doing better than the first time I read about all this!

Why things have gone wrong

With all the background out of the way, we can look more carefully at what’s gone wrong. It’s generally a combination of two things:

  1. The calculations are very difficult; and
  2. The Government (DWP) have done a terrible job at communicating what the changes mean for you.

Maybe (a) or (b) on their own would be manageable, but together its caused huge problems for a lot of people. Let’s look at some common questions.

“I was contracted out for most of my working life, I’ve now lost my pension!”

Nobody has “lost their pension”. How to think of this is to imagine two big jars. One labelled private pension, one state pension. If you were not contracted out when you earned money you filled up the private pension jar through your occupational scheme and you filled up the state pension jar via NICs. If you contracted out, you didn’t pay some of the NICs that you would have put into the state pension jar and but instead your employer would give you the value of that extra state pension “you were giving up” when it came to taking your private pension (i.e. by topping your pension up). By contracting out you traded some, or all, of the state pension for a more generous private pension.

“Nobody told me this at the time!”

The contracting out decision was usually done at the workplace, not individual level. That’s because if there were mix-and-match of people with different contributions it would have been a ballache for HR to calculate. So usually all employees at a company contracted out or they all didn’t. As Sir Steve Webb (ex-Pension Minister) says: “you were probably not aware of this at the time – the National Insurance figure was simply deducted at the reduced rate from your paypacket without you realising that it was a lower rate.”

“I made voluntary class 3 contributions and it didn’t increase the state pension I’m due to get”

This can happen for two reasons, both reflect poorly on DWP/HMRC.

The first reason is that you would have made contributions for years before 6 April 2016 and your Starting Amount is based on the Old System. As I mentioned above, if your Starting Amount is based on the Old System, contributions for years before 6 April 2016 may not increase your pension. By topping up for years before 6 April 2016 you may have been topping up an already “maxed out” old Basic State Pension.

Being frank, I think the Government should take a big bit of blame on this (as well as elements of the financial press exhorting people to make Class 3 contributions). They heavily warned people that they might need to make voluntary contributions but they made it less clear on the very important “what years count” rule. This should have been in huge flashing lights for people to make it very clear what contributions earn what entitlements. For most people, the distinction of what year means what isn’t very clear and is arbitrary.

The second reason is that your Starting Amount is higher than the New State Pension. That is, you would have been better off under the old system than the new one so in effect you get paid an amount as if you were on the old system. Making class 3 contributions is therefore irrelevant.

The Government can maybe take a little less bashing on this. But the reason people get confused on this is because it is a very confusing calculation. To do the calculation you need to work out your entitlement to the BSP and ASP and this in turn may require you to calculate your accruals under SERPS. You then also need to calculate the much simpler entitlement under the NSP. So, it’s all well and good bringing in a new, simpler system but the reality is, it’s not simpler for most people, in fact it’s a lot more complicated.

This is not to mentioned other issue, Pension Credits, which may secretly kick in which would top-up your income to a level near-commensurate with NSP and make voluntary contributions not cost-effective.

What you can do about it

If you are reading this and thinking about your pensions entitlement and whether you need to make voluntary contributions then you can get what’s called a State Pension Statement from the Government. You can do so from the following website: Alternatively, you can complete what’s called a BR19 form and post it off. You can download the form from this website:

The statement will give you a headline figure: for a lot of people this will be £164.35 (for 2018/19). This is the full New State Pension. If your figure is more than £164.35 then that means you accrued a higher entitlement under the old system, so you’re state pension is based on that (see about the Starting Amount above). If your figure is less than £164.35 then that means you have yet to earn enough NI years to get the full NSP. This means you need to make further NICs to get the 35 years required for the full NSP. You can do this in a few ways:

If your starting amount is based on the Old State Pension:

  1. If you have more than 30 NIC years then you can’t top up your pension using pre April 2016 contributions. But you can make post April 2016 contributions. Either through working, voluntary Class 3 contributions, or self-employed Class 2 contributions.
  2. If you have less than 30 NIC years then you can top up your pension using pre April 2016 contributions to a maximum of 30 years (thereafter extra pre April 2016 contributions will not add to your pension). If at this point your starting amount is still less than £164.35 you can make post April 2016 contributions to increase your pension.

If your starting amount is based on the New State Pension:

  1. You can work for the additional years required, making Class 1 or Class 2 contributions.
  2. You can make voluntary Class 3 NICs for any incomplete contribution years over the past six years by paying for the relevant missing months.
  3. If you have lots of years left until SPA, it might not be worth making voluntary contributions for gaps, as you might get the required number of NIC years through future contributions.

If your statement shows an amount less than you were expecting, or don’t understand it, then you can call the Future Pension Centre on 0345 3000 168. They will be able to explain how the figures are calculated and send these calculations to you in writing. They can’t give you financial advice however, so don’t expect them to advise you whether to pay any voluntary NICs. From what I’ve read online, the vast majority of people find them very helpful to contact.

Some closing thoughts

If you’ve got this far, thank you for reading. I appreciate this is a potentially very dry and dull topic. Whilst there has been lots written on the subject, I have struggled to find resources that pulls it all together and aren’t 30 pages long! The best resource I have found is a presentation by Royal London from 2017 (link) and on the related website (note: it’s set out for “advisers only” so use at your own risk).

Below is a diagram from the presentation that pretty much puts into pictures what I’ve set out above. Even in diagrammatic-form it’s still quite a chore (note 2016/17 figures are used in the diagram).

[edit 27/05/2018: Royal London updated the above resource for 2017/18, the link should take you to the updated slide deck. The picture above is still for 2015/16]

Some further helpful resources:

Royal London:

Pensions Man:

Age UK:

Whilst I think the intention behind the move to a single-tier pension is noble, it has been poorly executed. HMRC and DWP do not have stellar reputations in being open, transparent and good communicators. Expecting them to communicate such wholesale and complicated changes was never going to be without hiccups. Another issue was trying to do too much in one go; fiddling around with NI years, contracting out changes and the extensive linking to the old State Pension. In addition, there’s stuff I haven’t even talked about, such as changes to the state pension age and bereavement allowances. In that sense it feels like the main purpose of the change, simplification has been lost in trying to achieve other (political?) motives.

Please feel free to share your thoughts. Whilst I’ve tried to ensure I’ve got everything correct, there’s a possibility (probability?) I may have made mistakes or typos in places. As always, conduct your own due diligence and if in doubt speak to an expert.

All the best,

Young FI Guy

37 thoughts on “The State Pension NI Fiasco?

  1. hey, thanks for insightful article- well though and laid out. Only comment might be that the text for the numbered bullet points feel really small- no biggie i can enlarge size but just feel squinting a bit to read smaller text sorry!

  2. Well done for putting all that together. Must have taken ages.

    I used the link to check my pension and found out I need 6 more years contributions for full pension. Cheers.

    Typical government effort to complicate things beyond all reason. Why can’t they simplify things. It must cost more in admin than the money they are trying to save!

  3. As someone who has tried to get to grips with the old/new state pensions for my book ‘DIY Pensions’ I can really appreciate the research and effort you must have put in to present such a clear analysis…well done!

  4. Wow, talk about a mess, I used to think only states could have byzantine bureaucracy until I worked for a corporate where people designed new unnecessary procedures nobody else could understand, so they could keep their jobs as it then made it unclear whether they were ‘crucial staff’ because the work was actually real or not. (Surprisingly common and effective trick, more applicable to higher jobs since they were more complex and the people too senior to grill)

    I’m relieved it’s complicated though for one reason, I never quite understood my own pension throughout my corporate years and thought that meant I had to be dumb in that sense at least. Boy, it’s going to bring a lot of people untold misery when they arrive at judgement day to find they haven’t anywhere near enough to survive on. I have a rule I devised when trying to improve my personal communication skills after realising to my surprise that most people fluent in a language are still somehow quite poor at getting the message across to someone else also fluent. I practice on a 10-year old first until they get the principle immediately if not the detail, otherwise adults will just nod or agree in case they look thick or simply because they’re bored. (sometimes the fact that you can’t explain it well tells you that you may not understand it properly yourself)

    I may well be wrong, but am calculating that the state will not be able to pay when my time comes, since there’s still more than a couple of decades to go and the economy has been on an unchanging declining trend for a couple of generations at least now.

    1. Hi FI Warrior, I think a lot of the problem we’ve seen with the New State Pension transition period boils down to your first two paragraphs combining. I think the concept of making a simpler state pension is good. And that seems to have been the starting point for lots of these changes (or at least, seems to have been the brainchild of Sir Steve Webb, the former pensions minster). But what happened, and this happens very often in the public sector, is that more and more politicians and mandarins want to add their own zest to the changes. What starts out as a clear project with defined aims, becomes a behemoth with bolted-on additions. The additions often end up contradictory or undermine each other. I think we had that here with the single-tier coming in at the same time as SPA increases, NIC changes, end of contracting out – too much all in one go. The simplification becomes less simple.

      Researching and writing this article, I found that most resources fell into two buckets: they were simplistic or just far too complicated to understand on a first read. The simplistic ones missed out how key elements interact: most importantly, they picked up on the changes to the number of NIC years required, but didn’t mention how this interacts with the Old State Pension (many articles neglect to mention the Old State Pension at all, or comment only on passing. The complicated articles leave me, even as a Chartered Accountant and MSCI scratching my head. All the articles, simple or not, were too long. Most 20/30/40 pages long, I valiantly tried to keep this to 2,000 words, but I’ll take 3,000!

      On your last paragraph, I will confess, as I’ve mentioned here and elsewhere, that I’m pessimistic on the future of the State Pension for me personally. The trend over the last 30 years has been to cut away at the State Provision towards higher earners, both State Pension and tax-relief on Private Pension. This has particularly ramped up, as I mentioned in the piece, since 2002 and S2P. Since then, almost all changes to Pensions have been to take away from higher earners. I can’t help but feel (and this is speculation), that the end of the road is with an element of means testing on the State Pension, where higher earners have their entitlements tapered or taxed at higher rates. I certainly can’t see how the State Pension can be affordable in its current guise – and neither does the Government, Work & Pensions Select Committee and a significant proportion of the industry.

  5. Hi, re: ‘I’m pessimistic on the future of the State Pension for me personally/higher earners have their entitlements tapered or taxed at higher rates’

    This is an intelligent guess based on real actions from the recent past, which I agreed with totally, but what I’m saying is far more heretical and certainly not just a randomly flippant comment, made when in a low mood. States in today’s world whose economies are faltering fast will simply be unable to pay their legacy debts, the UK has only recently added the banker bailout for the next generations of unborn growing poor to shoulder in this country for example. But as in Greece, there comes a point where the debt to earnings ratio is unsustainable and if you bleed the patient to the point where they’re too anaemic to work hard enough to afford to live, then the game is over anyway.

    Without their former colonies to loot, certain countries such as the UK have lost the ability to pay for their current lifestyles, but are carrying on like a Wile E Coyote cartoon running in the air over the cliff edge. You can carry on for only as long as the foreign creditors lending you the money for the deficit believe you have a way of paying back, but once that bubble pops, it’s Zimbabwe for you and as always, the elite can use their taxhaven boltholes like Monaco to evade the mess, but normal people will lose everything, like in the Weimar Republic or Argentina.

  6. Yeah, it’s certainly a mess – I actually do well state pension wise with the current system, but who knows what will change with the next iteration of changes.

    And to point out your first 4 links are all from the Daily Mail, and need to be taken in that context and perhaps balanced against some less right wing angsty stories.

    1. Hi Ms Zi You, very pleased to see you commenting. I know I can be quite a downer on these things, so I’m glad you’ve mentioned that you will do well with the New State Pension. In fact, that’s going to be the case for (probably) a majority of people and that’s a good thing. Whilst it’s a mess at the moment, hopefully, once the transition period is over, things will straighten out. However, given how many times S2P changed (not to mention it only lasted just over a decade), who’s to know whether the New State Pension will be given time to sort itself out.

      I appreciate all the links are from This is Money, the Daily Mail’s money site, but I’ll confess I think it’s actually a great site and probably the best of the national newspaper’s offerings. This is Money can be a bit overly dramatic at times, but I generally find their offering politically neutral. There were some pieces from the FT and Telegraph I considered, but given they are behind various paywalls, I decided to find equivalents from This is Money instead.

      1. It’s a strange thing, but you can learn far more about reality from the ever-excited, over-excited Mail than from the Guardian.

  7. Thanks for this – I am somewhat content in my ignorance on all this, as I’m too young for it to apply to me.

    However, one related issue I am wondering about is whether I should take a punt on ‘topping up’ previous year’s partial NI contributions. At the moment I have 11 full years of NICS, and 3 partial years I can ‘top up’ (at a cost of £550-£680 per year). I’m in two minds. I plan to FIRE well before I reach the full 35 years of NICS, but I wonder if topping them up now is a waste of time and money… I strongly suspect the state pension will become means-tested at some point long before I’m eligible.

    I guess you might be in a similar position too – any speculative thoughts?

    1. Hi FitFunemployed, great question. The answer is… it depends.

      The numbers (assuming New State Pension system): each NIC year buys £4.70pw extra pension (£164.35pw/35yrs) or c.£240 per year. At a cost of £600, it would take only 2.5yrs to get back the ‘investment’. Now it depends how the NSP interacts with inflation. If it increases less than inflation, some of the value will be eroded by inflation. On the other hand, if it increases at or above inflation (as it currently does with the triple lock), the value will increase. Bear in mind tax as well. If you’re a 20% payer it’ll take just over 3 years to ‘pay back’ (2.5/80%); if you’re a 40% payers, just over 4 years (2.5/60%).

      It’s difficult one to know either away, as if you have a long way until SPA, there’s a lot of NIC years you can rack up. You need ‘only’ earn £5,876 a year (employed) or £6,205 a year (self-employed) to get a NIC year. Which can be entirely doable even if ‘retired’. Right now, I have 10 years, with 2 years missing and at least 40 years to go until I reach SPA. I haven’t filled in my gaps yet, but I’ve got until 5 April 2023 to make my mind up (it should say on the missing years when you have to make a contribution by). I’m also part time working, and I’ll be paying Class 2 either involuntarily or voluntary. Class 2 is exceptionally cheap at £2.65 a week, but might not live long for this world as the Government has tried to scrap it once only to get a fierce backlash and have to make a U-turn.

      I’d suggest having a look at the Pension Man link in my post which has a great set of tips – one of the few sources that covers all the points whilst not being longer than War and Peace!

  8. Thanks! That’s really helpful. I too have until 2023 (though .GOV states the cost to top up each partial year ‘may rise’ after April 2019). I’m not aware of different types of NIC contribution – Class 2 and presumably Class 1, etc. – so I will do some reading of the site you recommend…

  9. I knew it was complicated, but not that complicated! I have 28 years up to April 16, one year after, and could top up 1 incomplete and 2 complete years before April 16.

    DWP’s pension forecast is 30.0082/35 of NSP, and says I need 5 more years, then says I have 29 years contributions on the next page. No idea why there is a one year anomaly.

    I guess the accuracy of the fraction means I am on NSP and have no ASP/SERPS/S2P, so certainly will put in the part year, and may put in the 2 missing years (I’ve no plans to work again), by Apr 19 when the rates go up, but might wait for the latter until 2023 when they might have finally sorted their IT systems.

    Before I do I will ring them and ask if they have a ‘what-if’ calculator, If I pay for 2007-8 how much more a week will I get.

    Your posting was *really* helpful as it reminds me that I won’t be able to do their calculation, so will have to trust them. I also like your comments on Monevator, keep up the good work.

  10. A very big thank u for taking the time and effort to compile all this info. Im 7 years from state pension and its very usefull to have a go_to place for info.

  11. Firstly, thanks very much for taking the time and effort to write up this great post on such a complicated system – I thought I’d read all there was to know about the state pension and NI payments but your post filled in some gaps I didn’t even know existed, haha!

    I too have checked my pension and I need 7 more years to get the 35 years. However, I was contracted out for around 16-17 years, so not sure I’ll be able to recoup the full amount in those 7 years – it’s not clear how that works but if I never get the full state pension as a result of contracting out, I can live with that as I’ve paid less NI.

    I know many people aiming for FI or FIRE don’t include the state pension in their plans but I do include it as I can’t see how it won’t be there, in some form or another. However, if for some highly unlikely reason there’s nowt in the pot left for me, with my own savings/investments, I’m not going to starve but will probably be living a far more frugal existence than planned.

  12. I’ve got 7 more NIC years to get to 35 years which should get me the max allowed pension.

    However, I was contracted out (via my company pension), meaning that I paid reduced NI for many years.

    The website tells me that my Contracted Out Pension Equivalent (COPE) is £31.10 a week, so my max pension is actually reduced by this amount, as it’s supposedly accounted for in my company pension..

    However, by adding further NIC qualifying years before I reach state pension age, I might be able to get that £31.10 down to zero (so no reduction) but I don’t know if I can do it in 7 years, which is around the time I hope to reach my FI number.

    1. I’ve got you now Weenie. Thank you! Sorry, I wasn’t really engaging my brain when I was reading your comment. The maths does feel more complicated for early retirees because the period in which you can get NIC qualifying years is reduced. One potential option is, when you FIRE, to have a side-hustle and pay voluntary Class 2 NIC. Unfortunately, as I mention above, I think that avenue is going to be closed very soon. Of course, there’s nothing to say you can’t make voluntary Class 3 contributions further down the line (although they’ll likely be more expensive).

      [Edit: spelling and addition in italics]

  13. This is a brilliant piece of work.

    I’ve been trying to sort out my state pension since 2013 on two accounts –

    1. Being a WASPI woman – I’m not complaining, I just had to re-arrange my plans in my late fifties as my state pension date went from 60 to 64 then 66. I saved a lot more. I wrote to my MP about the speed of change and the reply on several pages of very, very expensive embossed HofP velum said (paraphrasing) hard luck, we were in a hurry and we knew we could get away with it. Well, I knew where I stood!

    2. Then the new state pension arrived in 2016 and I found I would not get the full amount due to contracting out. The only good source of information was Steve Webb on ThisisMoney and Royal London, which I could not cross reference anywhere else. So your excellent piece is needed out there.

    I use the Government Gateway to check everything (I am trusting it is correct!!) The lady on the telephone helpline was very clear, confirming my calculations of the correct NI year to pay, the correct amount, how long it would take, who and when to phone if I heard nothing back. Other tips were that the cheque and covering letter would be scanned front only, so write your NI number on the top of the cheque and use one side of the cover letter only, stating year and ask for a receipt. It went to plan and I now have successfully managed to top up my NI contributions to get the full new state pension in two years time when I am 66.

  14. @John Bray and likely many others: the 30-year qualification period was VERY brief (disastrous Govt error IMHO), before that it was 44 years for men, 38 for women. Be careful when waiting to pay top-up NICs contributions because you have only ?still 7 years to fill in such gaps normally. The DWP is able to identify your complete NICs contribution record to the end of the last tax year, but you may have to write a letter giving it permission to access it, something to do with HMRC holding the records not the DWP and the two computer systems not being allowed to talk to each other under human rights legislation they tried to tell me. Honestly, I’m not making this up.

    @Rowan Tree: sage advice, most of the WASPIs and others, the unhappiness for those with contracted-out contribution years arises because even the DWP seems unable to explain how the contracted-out deductions are calculated, so it does come as a nasty shock. However, they are itemised (as a single lump sum per week) on the calculation of state pension you will receive every year, and by definition if you see that you know that your erstwhile employer(s) will be paying you that equivalent amount or more, from which HMRC will deduct your tax. Although the state pension is taxable, any amount you are deemed to owe will be deducted not from it (which I guess means it’s always likely to be less than the personal allowance) but from any other pensions, annuities or income you receive. By law your contracted-out pension payments cannot ever be less than the contracted-out deduction, so I’m watching my annual statements from the DWP most carefully!

    1. Thanks Lindsey for the helpful and interesting comment. Just wanted to pick up on one thing:

      “By law your contracted-out pension payments cannot ever be less than the contracted-out deduction”

      This is called the “GMP” – Guaranteed Minimum Pension. If this concept is unfamiliar a good starting point (as ever) is Sir Steve Webb and this is money:

      1. Thanks, YoungFIGuy; further inspired by your response and link, I’ve just been checking my pension file, and it seems that the really crucial date is April 1988, as accruals contracted out before then were not mandated to be inflation-linked (although individual schemes might be), but afterwards were, so there’s a potential anomaly on the annual DWP statements, not least in the naming of the GMP.

        My original comment that you quote is not strictly accurate therefore since any increases could depend on the amount accrued after 1988, the annual rate of inflation during retirement and the length of time in payment in order to stay ahead of the non-contracted-out equivalent. Weenie’s probably young enough to be OK, but virtually all my accruals were before, so it would appear that despite the lovely man from the DWP’s verbal reassurance, my own GMP may not keep up with the foregone State equivalent.

        Similarly, my younger sister (a WASPI), newly in receipt of her pension now receives a substantially higher income from the State than I do; having missed out on four years plus of payments, she does receive not only the higher flat-rate pension but an extra payment from her late husband’s pension/SERPs, all of which have just been increased under the triple lock.

        I’ve always assumed that post-simplification the various add-ons to the old basic State pension, which hitherto increased at a lower rate annually than the basic (even before the adoption of the triple lock) would eventually result in a total eroded away to the same level as the new flat-rate. However, this year for the first time all of the add-ons (graduated retirement benefit, SERPS, S2P) have increased at the same rate as the basic. This can only mean that the triple lock will soon be ditched, since for many these add-ons comprise 50% or more of each payment and if this were to continue it would delay by many more years the eventual point of parity between the old and the new systems.

        Steve Webb’s command of his subject is seriously impressive, and I do agree that This is Money gives excellent guidance to this can of worms in particular!

        1. Hi Lindsey and thanks again for a great comment. You’re correct pre-88 GMP is not increased by the Government but your pension scheme might grant increases on pre-88 GMP (although this is unusual). It’s possible therefore that the state pension increases at a higher rate than your pre-88 GMP. I don’t know if this is taken into account with the New State Pension calculation (because it’s so complicated and I’m not an expert!). Coming back to the quote, this should be the case, but the payments in question may increase at different rates.

          It’s a shame that Steve Webb is no longer Pension Minister – an unfortunate victim of politics. He is very knowledgeable and brought a great deal of expertise to the Government.

          1. Hi YoungFIGuy
            Yes indeed all hail to Steve Webb, I hope he’s in the right position to do good things at Royal London; and a special laurel wreath to you for your masterly exposition. It’s really great to see the more recent adopters of the FI mantra discussing matters which will affect all of us eventually, rather than just how to invest cash which most don’t have to hand, and don’t have the mindset needed to amass.

            While it seems clear that the State pension cannot continue even in its relatively radically reformed new edition, and of course many of your readers hope not to need it, anything can happen to anyone at any time and it could be literally an individual’s lifesaver eventually so it behoves us all to nurture it for the common good.

            FWIW, in my opinion it would be politically impossible for the govt of the day to ditch it entirely although it could mutate beyond all recognition. Methinks having to state one’s NICs number on ISA applications is possibly a precursor to some variant on the Lifetime ISA, and there’s been been very little public discussion on the possible reversal of hitherto increasing life expectancy starting to show up in the statistics; it also would be relatively easy to means-test it for ‘the rich’, of course. Just saying! Look at what’s happened since the introduction of the Lifetime Allowance (how it has shrunk) and GPs, as well as other well-remunerated public-sector types retiring early, conceivably because they don’t have the time or the inclination to learn about investing. VCTs have seen massive inflows before the end of the last tax year.

          2. Thank you Lindsey for your very kind words. My aim with this blog is to be a little bit different and to talk about some of the things that are a little bit less talked about!

  15. I am in the position that I have 42 years of NI contributions so you would I expect that I would be entitled to a full state pension, but no HMRC says I need another 2 years of contributions before I can expect such. The reason being that I was contracted out from Nov 1986 to June 1989 (2 years 7 months). I have disagreed with their position by stating that if I had been unemployed for those years they would just have not been counted. The fact that I was contracted out so take 3 years from my NI contributions I still have 39 years more than the 35 years needed. Perhaps someone can explain this situation to me as it defies commonsense.

  16. @Ann Morris, with apologies to all for the length:
    You may find the Dept for Work and Pensions more helpful, as it does the paying whereas HMRC does the taking. The way that the contracted out deduction works is not by simply deducting the relevant years from your accrued NICs years altogether. You receive NICs credits for each full (tax) year worked, but only full years ‘count’, so in your case you worked two part tax years whilst contracted out (1986/7 and 1989/90) plus two whole years (1987/8 and 1988/9) in between, because of the tax years running 6th April to 5th April, not calendar years. If you were continuously employed between Nov ’86-June’89, your NICS contributions would have been deducted under PAYE by your employer along with your tax, but only the two intervening whole years’ worth of NICS are included in your State pension calculations unless of course you were employed but not contracted-out for the remainder of the two part-years. I think this practice may date from the time when there were weekly stamps which were physically attached to a card to show the class of contribution per week, as this might be subject to change – for example there was also the ‘married womens’ stamp’ which was paid at a lower rate, but entitled the worker to a spouse’s pension.

    For the part years, it used to be possible to buy the missing weeks in order to make the part year ‘count’ as a whole one, but only within (I think it was seven years) a limited period afterwards. It might be worth enquiring if you are still able to do this for any missing years. However, even if not, the contracted-out deduction will be made as the proportion of the NICs that you paid, part of which your employer took but retained within the employer’s own pension scheme. As far as I know, it is not and never has been possible to buy back NICs into the State scheme which has been contracted out to a private one, because that is eventually paid out as part of the employer’s scheme. Obviously you haven’t ‘lost’ those contributions, but do need to make sure that your employer during that time has your current contact details in order to be able to pay you that pension.

    I’d also been contracted out for a slightly longer period slightly earlier, so as my State pension is calculated under the old scheme, of the basic rate for 2019/20 of £129.25 per week, £14.08 will be deducted as my contracted-out deduction from 8th April, 2p per week more than for this current tax year. However, I did make up a couple of incomplete years of NICs in order to get the full basic rate and you might want to calculate whether it’s worthwhile to buy the missing ‘stamps’ or not, on that basis; it may depend on whether you qualify for the new flat-rate or under the old basic rate as I do. I paid the full rate for the full qualifying period of 38 years for women; one thirty-eighth of £129.25 equates to £3.40, so by that logic two lost years would be £6.80 making the weekly basic pension £122.85. I HAVE NO IDEA if this is how it is actually calculated, however. I am one of the last women to qualify for my pension aged 60.

    As the OP makes clear, only those who qualify for the new flat rate (by virtue of their date of birth) do so on the basis of 35 full years’ NICs, whereas for many years under the old scheme men needed 44 years, women 38. Could this be the source of the confusion? Neither scheme gave more than the full rate for more than the minimum number of qualifying years – now if you work for longer than 35 years, you don’t get extra pension – although it’s a flat rate per year, I believe you must have a minimum of 10 years’ worth of contributions. There’s also a transitional group, where calculations made by the DWP have to be made individually so that no-one loses out on benefits accrued under the old system, for entitlement to SERPS etc, which would result in that individual receiving less under the new flat-rate system than they would qualify for under the old system. For example, my sister, one of the WASPIs, began receiving her State pension about a year ago at age 65 (following one of the longest delays caused by the transition) but receives considerably more than the new flat rate because she receives part of her late husband’s pension in addition to that accrued in her own right.

    I do hope that this helps – and if perchance you do find out any information about how the contracted-out deduction is calculated, it would help many if you could share!

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