Pension Payback Prevention

Whilst, like many others who are in their 30s and 40s, I don’t believe that the UK State Pension will be around when I am eligible to receive it (in 2050!), it’s still worth keeping it in the back of your mind when it comes to FIRE planning.

Even if you are jet setting millionaire, living abroad and not planning to ever return to live in the UK it’s worth keeping an eye on it and if necessary paying voluntary NI contributions to ensure that you receive the full amount when your time comes.

You can even receive it if you don’t live in the country though – so it’s a pretty nice thing to have in case you ever need it.life expectancy

At my age now of 36, I need to wait until 68 to receive my state pension but I can expect to live until I am 86 which is incredibly 50 years from now – and if I live that long I  will receive the state pension for 18 years.

I’ve a 50% chance of living until 88, 25% chance of hitting 95 and I even have a 1 in 10 chance of reaching a century!  All of these numbers would surely test to 4% SWR – especially over an 80 year time horizon!

Give it a go yourself.  There are lots of others to chose from which include more factors than just your DOB and Sex.

Pension Planning

How am I going to survive those next 50 years? Stocks and Shares / ISAs, LISAs, SIPPs, DC Pension, work, inheritance, benefits or others [1] [2]…  You need to have a plan and the state pension can be part of that.

In some ways, the UK State Pension can be considered an insurance policy against living too long. Whilst some countries with different state pensions and healthcare systems may make it tough on pensioners or early retirees, the UK is relatively kind.  Of course pension rules may and will change over the decades.

To get the UK “New State Pension” you need to have made at least 10 years sufficient NI contributions up to a maximum of 35 to get the full amount of £164.35 (due to increase to £168.60 in April and that value should increase with inflation.

That works out as  I’ve already made 16 years of NI contributions meaning if I stop contributing, I would be eligible for £75 a week from the age of 68.  If I live until I have 86 that makes the pension worth about £70k!

That’s GFF sorted for old age then.  But what about the Lady?

Well, she’s not originally from the UK and has only built up 8 years of contributions meaning she gets nothing (yet).

However one curious feature of the UK tax and benefits system is that parents in receipt of child benefit automatically get NI Credits added to their stamp until they are 12.  Looking at it that way, the Lady will have about 20 years contributions by the time the kids are teenagers (a horrifying thought).

The value of those 12 years for both of us is approximately in excess of £100,000 (assuming average life expectancy) – so having kids can pay off for FIREes – the perk of child benefit is another sweetener even if it is easier without children.

When the Lady came to the UK, she worked half a tax year but didn’t pay enough NI to get a full year’s stamp.  You are able to make up on missed years to boost your pension but there is a 6 year back window and after that it’s too late.  I should have checked what her record was was earlier – because when I did it was too late.  And I’m not happy about it.  I should have been better organised but I didn’t consider it until it was too late.

I too have gaps in my record of 4 years when I was in university.  If I had had good advice back then, I would have invested in it.  The cost for Class 3 contributions is about £760 for each year but that will pay you an extra £240 a year in state pension which is a 3 year pay off.  It’s not a new idea but it’s something that younger people might want to think about, especially if you have gaps due to Uni, travel, low-pay or living abroad.

The way things look for us right now, we could predictably have 28 & 20 years of contributions between us by the time our kids are teens.  Missing a year or two is neither here nor there and we may just make voluntary NI payments if we are retired then anyway to bring us up to 35 years (or we may still be in work – heaven forbid!)

In summary.  The UK State Pension shouldn’t be the first plank of your retirement plans but it can be thought of as back-up longevity insurance.  The cost of the insurance is well worth it and I would suggest you check your NI record and make up any missed years up to 6 tax years ago (2011-12 at present).  Here’s the link to get started.

Good luck, GFF

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10 thoughts on “Pension Payback Prevention

  1. “Hope for the best, plan for the worst” – my view is that the SRP will be around. Although it may be that a future government introduces some sort of means testing. But that would be very controversial. Having said that, given today’s bizarre politics, who knows?

    Liked by 1 person

      1. I still have another 4 years before mine arrives 😦
        Living on my occupational pension at the mo, and managing ok, so when it does arrive it could be party time. haha. Due to being contracted out, however, I don’t get the new max, even after 41 years NI. Shouldn’t grumble. Ho hum…

        Liked by 1 person

  2. I expect the state pension to be there for me – otherwise there would be complete uproar if it wasn’t there. Not for me – for me, I’d have to go to Plan B as no state pension would mean a big bad hole in my retirement plans but I wouldn’t be left starving or destitute, unlike others who will be relying solely on their state pension.

    So, state pension is part of my FIRE planning – I’ve paid around 28/29 years of NI so only 7/8 years left to pay to get the ‘full’ amount. I say ‘full’ because for around 20 years, like @broadbandy legs, I was contracted out and thereby will get a lower state pension. I’m not sure that I’m able to recoup that NI in the 7/8 years I’ll be working but at the moment, I’ll get paid around £31 less per week.

    Like you, I too had gaps in my record (while I was at uni) and had I been aware, I would had paid up. No easy website to check back in those days though and I don’t ever recall HMRC advising me that I could have paid in.

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    1. with Uni – I very much doubt that with all the advice that kids have these days on money that paying voluntary NI is even on the list.
      Sometimes you do read “pay your kids fees or give them a housing deposit” but I’ve not read them as I’m not in either position.

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