I’m confused by my state pension forecast and wonder if you can explain it for me.
I am 64 and spent 30 years in the fire service pension scheme, and have a further 11 qualifying years from various other jobs.
My forecast is:
Based on NI contributions to Apr 2022: £171.87 a week
If I contribute to April 2024: £183.52 a week
Most I could increase to: £203.85 a week.
I have 41 years of qualifying contributions, 30 of which are contracted out, so if I contribute for another two years, to state pension age, how can this increase my pension by £11.65 a week?
If I already have more than enough qualifying years, it seems to me that paying another two years’ contributions would only replace two contracted out years with two fully paid years which wouldn’t amount to anything like the forecast increase.
This I estimate would only be something like £1.32 a week.
Is there some mechanism that I have not understood? Or would I be wasting money buying extra years? Also, how could I increase my state pension to the full £203.85 a week? I’m struggling to make sense of this.
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Steve Webb replies: I agree that the information that you see on the state pension forecast site can be confusing.
However, the good news is that you can indeed boost your state pension at relatively modest cost.
Let me start by clarifying the three numbers that you have been presented with.
The lowest number (£171.87) is the pension you have earned to date. Even if you make no further contributions, you will get a pension of this amount.
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The second number (£183.52) is the pension you could get purely by contributing between now and pension age.
In your case this is two more years. I will explain in a moment how a couple more years comes to add significantly to your pension.
The highest number (£203.85) is the maximum state pension you could possibly get. This is the standard ‘flat rate’ amount.
You could achieve this by, for example, working or contributing up to retirement *and* paying contributions for several additional years since the 2016 changeover date when the new state pension was introduced.
In terms of the amounts we are talking about, the key is to understand how the new state pension is worked out.
In brief this is in two stages.
First, they give you a 2016 ‘starting amount’ based on your contributions at that point. This is based on the higher of what you would have got under the old rules by this point and what you would get under the new rules.
To explain in more detail, the first calculation is how much you would have got under the old system if nothing had changed (a full basic pension for 30 years or more of contributions plus a bit of additional ‘SERPS’ pension for any years when you were not contracted out).
The second calculation is what you would have got by 2016 if the new system had been in force from the beginning.
This is a full flat rate pension for 35 years of contributions minus a big deduction for someone such as yourself who had many years paying in at the lower ‘contracted out’ rate.
In your case it is pretty clear that the old rules will give you a bigger starting figure, so your 2016 starting amount will be a full basic pension (currently £156.20) plus a bit of additional pension.
On top of this 2016 starting figure, they then add 1/35 of the full flat rate (£203.85), for each extra year of contributions you have since 2016/17.
This means that an extra two years would get you an extra 2/35 of the flat rate or £11.65, which is exactly what you have been quoted.
But you can, if you wish, go much further.
From the figures you have supplied it sounds as though you have plenty of ‘gap years’ post 2016. Each one of these that you fill will also add 1/35 of the full flat rate or £5.82 per week.
If you were to fill four (as well as working/contributing up to retirement) then this would get you to the maximum flat rate.
I’ve written elsewhere a simple guide as to when topping up your state pension makes sense and when you should be careful.
But in principle, for someone in good health and who doesn’t expect to be on benefit in retirement, paying a lump sum now to boost your state pension can represent excellent value.
Turning finally to practicalities, I always stress that it’s very important not to try to do all of this on a ‘DIY’ basis.
Before handing over potentially thousands of pounds in voluntary NI contributions you should talk to the DWP Future Pension Centre, who can help check that you are buying the ‘right’ years and what impact this will have on your pension.
For any readers who are over state pension age, contact the DWP’s Pension Service.
You then need to contact HMRC to get the necessary 18 digit code number to make sure that your contributions are linked to the right NI account and the right years.
Although readers regularly report the challenges of getting through on these phone lines, it is worth persevering, as the boost to your lifetime retirement pension could be very substantial.
