Individuals with gaps in their National Insurance (NI) records have a unique opportunity to bolster their future state pension by paying for "lost" years. This initiative, which allows individuals to fill these gaps, extends back to the 2006-07 tax year, with a deadline set for April 5, 2025. People can choose which years they would like to pay for, potentially increasing their eventual state pension. As the deadline approaches, the number of people topping up their NI contributions has surged, highlighting the increasing awareness and importance of securing future financial stability.
The cost of filling an NI gap varies depending on the tax year in question. For instance, filling a gap for the full 2022-23 tax year requires £824.20, while the cost rises to £907.40 for 2023-24. This service is available to anyone with NI gaps that could, if filled, enhance their eventual state pension. To qualify for any new state pension, individuals need at least 10 qualifying years on their NI record, and each additional year contributes to a more substantial pension.
Tom Selby, Director of Public Policy at investment platform AJ Bell, explains the value of this opportunity.
"Essentially anyone who has had significant periods of their life where they haven’t been paying NI and as a result has got gaps in their record," said Selby.
This option may not be equally beneficial for everyone. Younger individuals are more likely to accumulate their NI contributions over time through regular employment. Therefore, buying extra NI years may not be necessary and could potentially be a waste of money for them.
"Most obviously, the younger you are, the more likely you are to naturally build up the 35-year NI record needed to entitle you to the full state pension," Selby noted.
The full rate of the new state pension currently stands at £221.20 per week. Adding an extra year to one's NI record can increase this by £6.32 per week, amounting to an additional £328.64 annually. This increment represents 1/35th of the full rate, underscoring the potential long-term benefits of filling NI gaps.
As the deadline to fill these gaps draws closer, Her Majesty's Revenue and Customs (HMRC) has observed a marked increase in individuals taking advantage of this opportunity. Between April and early February this year, approximately 37,000 people contributed a total of £35 million in top-ups online. By mid-February, this number had swelled to 60,000 individuals, who collectively added £62 million to their pension pots.
Selby also highlighted that while some people may find this investment worthwhile, others might not see immediate benefits.
"Where this is the case, the benefit of buying extra state pension years will effectively be lower, and so it will take a bit longer to break even," he stated.
The decision to fill NI gaps is not one-size-fits-all. While it can significantly boost future pensions for those with substantial gaps in their records, younger individuals or those closer to achieving the necessary 35 years for a full state pension might find it less advantageous. Individuals must assess their unique circumstances and consider factors such as their age, current number of qualifying years, and projected future earnings.