It's not too late to fill missing pension gaps

People who have been in and out of work over the years can still have payments backdated if they act quickly. Chiara Cavaglieri reports

(CHRISTOPHER FURLONG / GETTY IMAGES)

If you've been in and out of the workforce, there's a good chance your National Insurance contributions (NICs) record has a few holes.

This could significantly reduce your entitlement to the full basic state pension at retirement, but for those who act now there is still time to plug the gap with backdated payments.

The Department for Work and Pension (DWP) has issued a "use it or lose it" statement advising eligible individuals to take advantage of an opportunity to boost their state pension by thousands of pounds if they make voluntary contributions before the end of this tax year.

"It's important that people act quickly to take advantage of this offer to fill gaps in their National Insurance contributions. Thousands could be eligible for a pensions top-up for life, and back payments that could cover the up-front costs of their contributions," says the Minister for Pensions Steve Webb.

The DWP estimates that about 70,000 people could benefit from back payments, and many of these are women who have stayed at home to care for their children, or unpaid carers looking after family and friends. Since April 2010 about three-quarters of women reaching state pension age should be entitled to a full basic state pension compared with more than90 per cent of men.

Under current pension rules, women and men need 30 qualifying years to get the full basic state pension, worth £97.65 a week for this tax year. Each qualifying year is worth one 30th of the full amount, meaning that if you retire now with 20 years' worth of contributions, you would receive £65.10 a week. In the future, though, having a full NICs record may be more valuable still, with coalition plans to introduce an enhanced state pension dubbed the citizen's pension worth up to £140 per week.

There is already a scheme allowing any individual to make up a shortfall by paying voluntary Class 3 contributions, but this is usually limited to the past six tax years. Under separate measures introduced in 2009, however, if you retired, or will retire, between 2008 and 2015 you can buy up to six years on top of those already permitted and dated as far back as 1975.

To qualify, you must also have at least 20 qualifying years, although this can include full years of Home Responsibilities Protection designed to protect the contribution records of non-working parents.

"This offer is for those approaching retirement age so there is less risk that the terms of the pension will be changed," says Adrian Lowcock of independent financial adviser (IFA) Bestinvest.

Additionally, if you buy back those years before the 5 April deadline, you will qualify for backdating so that the increased pension would apply from the date that you reached the state pension age. After this date, it will still be possible for eligible people to fill gaps in their record with the additional voluntary payments, but the increase will not be backdated.

Each year paid for could increase the state pension by between 2 and 5 per cent, equating to between £1.95 and £4.85 a week using current rates, but the up-front costs of buying contributions can seem steep. A full year of voluntary Class 3 NICs currently costs £626.60.

For a woman who turned 60 in May 2008, with a reduced basic state pension of £82.03 a week, paying over £2,500 for four years of additional voluntary contributions would take her up to the full rate, worth an extra £15.62 a week.

An annual return of £812.24 for an initial payout of £2.500 may sound expensive, but remember that this is paid only once, while the extra £812.24, plus inflation, is paid for life.

"With the extra annual income from buying the years back you can see that it's a pretty good deal; you only need to live for three or four years to make that money back," says Laith Khalaf, pensions analyst at Hargreaves Lansdown.

A 60-year-old woman would need a pension pot of £26,128 to reach the same level of income buying an index-linked annuity. Add on the backdated benefits for paying before 5 April 2011, which come to more than £2,000 in this example, and it's easy to see why voluntary contributions can be a good idea. It's also important to remember that rates can change every year and usually go in only one direction – from 2011 it will cost £655.20 for each complete year – so buying back missing years this year will be considerably cheaper than next year.

Not everyone will benefit from paying voluntary contributions, however, and there are no refunds so it's important to calculate the advantages carefully and take independent advice if necessary. Start by obtaining a state pension forecast which will give you an estimate of the amount of basic and additional state pension you may get based on your NICs so far. If you already have enough qualifying years, or think you will have by the time you retire, there is little point buying back missed years.

"The further away you are from retirement, the more scope you have to build up NICs through employment," says Mr Khalaf.

It may also be the case that you can use your partner's contributions to improve your state pension without the need for extra voluntary NICs. Anyone on a low income could also lose out if they are claiming income-related benefits such as pension credit, which is paid out irrespective of an individual's NIC record and worth more than the full basic state pension anyway.

Other factors that could affect your decision include your life expectancy and whether you can qualify for a full pension via your husband, which will again make buying back extra years' NICs a waste of money.