It may not sound very exciting, but for many people in their 40s, 50s and 60s topping up your state pension can generate a better return than almost any other way of using your savings cash. In very simple terms, if you invest about £800-£900 now and end up living well into retirement, you could get back £6,500-plus. Live to a very ripe old age and it could be £10,000 or more.
Under the new state pension system, if your national insurance (NI) record started before April 2016 you will need at least 35 years of NI contributions or credits to qualify for the full payment of £221.20 a week.
If there are gaps in your NI record – perhaps for periods while you were bringing up your children – you can usually only pay voluntary contributions going back six years.
However, until 5 April 2025, the opportunity is extended back to the 2006-07 tax year. This concession only applies to those who come under the new state pension system: that is, men born on or after 6 April 1951, and women born on or after 6 April 1953.
Most people will need to pay voluntary “class 3” NI contributions to top up their state pension.
The rate you pay depends on which year you are buying. For example, the cost of class 3 contributions for each full tax year between 2006-2007 and 2019-2020 inclusive is £824.20 (£15.85 a week). The cost to fill in a gap in your NI record for the 2023-24 tax year is £907.40 (£17.45 a week).
This one-off payment can add up to 1/35th of the full rate to your eventual state pension. As the full new state pension is now £221.20 a week, this boost is worth £6.32 a week, or £328.64 a year.
Let’s say someone decides to top up 10 missing years of contributions, from 2006-07 to 2015-16 inclusive. They would pay £8,242.
In return for that payment, they would – based on current figures – enjoy a £3,286 annual state pension boost.
That would add up to just over £65,000 (before tax) over the course of a 20-year retirement. Over a 30-year retirement it would add up to just under £100,000.
As things stand, that income will be protected by the pensions triple lock, so the total gain could end up being quite a lot more than the above figures.
But there are caveats. For a start, the younger you are, the more likely it is that you will over time build up your NI contribution record in the normal way – which means that buying extra years now could be a waste of money.
Meanwhile, Webb – now a partner at the actuarial business LCP – says it is unlikely to be worth increasing your state pension if you expect to be on benefits in retirement.
If you have not yet reached state pension age, the first thing to do is to check your individual state pension forecast online: go to gov.uk/check-state-pension. This web address is home to a new digital service that will tell you how much state pension you are on course to receive, how much more you could get, and the voluntary NI contributions you would need to pay to achieve this.
If your predicted figure is already over the full new state pension amount, any years added to your NI record before reaching state pension age don’t add anything to what you will get.
Anyone with NI gaps in some of their tax years that could, if filled, increase their eventual state pension can use the service to choose which years they would like to pay to fill. They can then pay securely through the service.