LCP launches state pension NICs calculation tool

LCP launches state pension NICs calculation tool

Consultants LCP have launched a tool to help the public calculate if they can benefit from topping up the new state pension by paying voluntary national insurance contributions.

The amount of state pension an individual receives depends on their record of NICs and for those who reached pension age after April 5, 2016, the full flat rate pension is currently £185.15.  

However, for various reasons some people may receive less than this amount, and, in some cases, they may be able to boost their pension by paying voluntary NICs.

The new tool calculates if an individual can benefit from this.

LCP said the tool is timely as there is a deadline at the end of the current financial year for paying back historic missing years between 2006 and 2016.

The firm explained that one year of voluntary NICs typically costs £824.20 at current rates for Class 3 contributions. In many cases, this will boost state pension entitlement by 1/35th of the standard rate, or around £275 per year.  

This means that someone who tops up by one year will get their money back within four years of drawing their pension, even allowing for basic rate tax.  

Someone who draws a state pension for 20 years will get back £4,400 (net of basic rate tax) for their initial outlay of £824.20.

LCP said more than half a billion pounds has been paid by the public in voluntary NICs in the past four years alone.  

LCP partner Steve Webb predicted this year is likely to be another record, especially with the added impetus of the deadline at the end of this year for filling historic gaps.

He said: “I regularly hear from people who would be interested in boosting their state pension but are confused about whether they can do so and how to go about it.  

“At its best, topping up your state pension can generate a tremendous rate of return, far better than almost any other way of using spare capital. But there are many pitfalls to avoid, and we hope that our new website will help people to navigate the labyrinth of boosting their state pension.”

LCP said people considering topping up need to take a range of factors into account such as understanding that some years can be cheaper to top up than others and that filling blanks for certain years - particularly those before 2016/17 - can sometimes have no impact on the state pension.  

It said people who expect to be on benefit in retirement may find that some or all of any improvement in their state pension may be clawed back in reduced pension credit or housing benefit and those who were self-employed can save money by paying voluntary class 2 contributions, currently £163.80 per year, rather than class 3 contributions (£824.20 per year);

Before paying voluntary NICs, individuals should see if they can claim NI credits for a particular year such as those looking after grandchildren may be able to claim credits transferred from the child’s parent, and could be a cost-free way of boosting their state pension.