Up to £23,000 in additional savings available for ‘bargain rate’ of £4,000 in NICs, as former pensions minister highlights little-understood offer
Half a million current and former public sector employees have the ability to top up their state pension by thousands of pounds if they make voluntary national insurance contributions (NICs), according to former pensions minister Steve Webb.
Royal London, where Webb is now director of policy, has estimated that around 500,000 public sector workers could benefit from the deal over the next five years, including 210,000 NHS employees, 150,000 teachers and 130,000 people in the civil service.
His prediction relates to pension savers who are entitled to take out their occupational pension at 60, but will not be receive their state pension until they are 65 or 66. This group has the potential to pay heavily subsidised, “bargain basement rates” of voluntary NICs in the five or six years before they reach state pension age, making them about 30 per cent better off than they would have been otherwise.
Webb said: “This is similar to buying an index-linked annuity with an annuity rate of over 30 per cent – more than 10 times the rate available in the market.”
The potential additional cash is linked to the introduction of the flat-rate state pension for those who reach state pension age on or after 6 April 2016. The full amount of state pension, which currently stands at £155.65 a week, is paid to those who have made 35 ‘qualifying’ years of NICs while working.
The majority of people who are or were part of a public sector pension scheme generally paid national insurance at a lower rate because their scheme was contracted out. This means that in exchange for lower NICs, individuals gave up part or all of an additional pension scheme, and received additional pension payments from their occupational scheme or stakeholder pension instead. To reflect this, those savers will have a deduction made from their state pension, meaning most will not receive the full amount they might expect in the early years of retirement. Paying voluntary or Class 3 NICs can make up some of that shortfall.
Webb said this was an “attractive proposition” as the rate is heavily subsidised by the government. For instance, just one year of voluntary NICs can be bought for a lump sum of around £733. This would boost an individual’s state pension entitlement by around £230 a year for the rest of their life, and would generate £4,600 over the course of a 20-year retirement, meaning, a pension saver could receive an additional £23,000 for less than £4,000.
He added: “Large numbers of workers could gain a substantial boost to their state pension for the payment of a relatively modest lump sum. But the rules around topping up state pensions are complex. It is rare for the government to offer something on such generous financial terms and we want to make sure that everyone knows how to take advantage of this opportunity.”
Jamie Jenkins, head of pensions strategy at Standard Life, agreed that although paying Class 3 NICs would be a “very sensible thing for some people to do”, there was “a very big lack of awareness” of the option.
Getting a state pension forecast is vital for those considering taking the option, according to Nathan Long, head of corporate pension research at Hargreaves Lansdown. He said: “People who have been contracted out of the state pension, such as those who have been in most defined benefit (DB) pension schemes, may not have entitlement to the full rate of the new state pension. The first step for these individuals is to get a forecast for the state pension and understand how long they will continue working. Those with a shortfall may naturally catch up simply by working until they wish to stop working.
“Affordability will play a big part as to whether people top up their state pension. However, the key is that unless people know about this quirk they will not take any action,” he added. “Generally speaking, few people obtain state pension projections, so this must change. Steve Webb’s work in highlighting this issue is a great starting point, but more must be done to highlight the importance of getting state pension forecasts and planning well before the point of retirement,” said Long.
Story via – http://www.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2016/10/11/public-sector-workers-can-receive-huge-pension-boost-by-making-voluntary-payments.aspx