I’m confused about my state pension forecast and was wondering if you could explain it to me.
I am 64 years old and have worked in the fire department’s pension insurance for 30 years. I spent another 11 years in various other jobs.
My prediction is:
Based on NI contributions up to April 2022: £171.87 per week
If I contribute until April 2024: £183.52 per week
I could increase the maximum amount to £203.85 per week.
I have made eligible contributions for 41 years, 30 of which are contractual. So if I contribute for another two years until state pension age, how can that increase my pension by £11.65 a week?
If I already have more than enough years of eligibility, I believe paying an additional two years of contributions would only replace two contracted years with two fully paid years, which would not come close to the projected increase.
I estimate this would only be around £1.32 per week.
Is there a mechanism that I didn’t understand? Or would I be wasting money buying additional years? Also, how could I increase my state pension to the full £203.85 per week? I’m having a hard time understanding the whole thing.
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Steve Webb answers: I agree that the information you see on the State Pension Forecasting website can be confusing.
However, the good news is that you can actually increase your state pension at a relatively low cost.
Let me first explain the three figures that have been presented to you.
The lowest figure (£171.87) is the pension you have earned so far. Even if you make no further contributions, you will receive a pension of this amount.
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The second figure (£183.52) is the pension you could receive from contributions alone until retirement age.
In your case there are still two years. I’m about to explain how a few more years will significantly increase your pension.
The highest figure (£203.85) is the maximum state pension you could potentially receive. This is the standard flat rate amount.
You can do this, for example, by continuing to work or pay contributions *and* pay contributions for several years since the changeover date in 2016, when the new state pension was introduced.
The amounts we are talking about come down to understanding how the new state pension is structured.
In short, this occurs in two phases.
First, you will receive a “starting amount” for 2016 based on your contributions at that time. This is based on the greater of what you would have received at that point under the old rules and what you would receive under the new rules.
To explain in more detail: The first calculation is how much you would have received under the old system if nothing had changed (a full basic pension for 30 or more years of contributions, plus some additional “SERPS” pension for all years in which you … were not awarded).
The second calculation is what would have been achieved by 2016 if the new system had been in place from the start.
This is a full flat rate pension for 35 years of contributions, minus a large deduction for someone like you who has paid in at the lower “contracted out” premium for many years.
In your case it is pretty clear that under the old rules you will receive a higher starting amount, so your starting amount for 2016 will be a full basic pension (currently £156.20) plus some additional pension.
Useful links to top up your statutory pension
In addition to this 2016 starting value, 1/35 of the full flat rate (£203.85) is then added for each additional year of contributions since 2016/17.
This means that with two more years you would receive an additional 2/35ths of the flat rate or £11.65, which is exactly what you were quoted.
But you can go much further if you want.
From the numbers you provided, it can be concluded that there are still many “gap years” after 2016. For each individual year you complete you will also be charged 1/35th of the full flat rate or £5.82 per week.
If you complete four (and work/contribute until retirement), you will receive the maximum lump sum.
I have written a simple guide elsewhere on when it makes sense to top up your state pension and when you should be careful.
But in principle, for someone who is in good health and does not expect to receive benefits in retirement, paying a lump sum now to top up their state pension can be of great benefit.
Finally, when I turn to the practical aspects, I always want to emphasize that it is very important not to try to do everything “do it yourself”.
Before potentially transferring thousands of pounds in voluntary NI contributions, you should speak to the DWP Future Pension Center who can help you check whether you are buying the ‘right’ years and what impact this will have on your pension.
For any readers who are over the state pension age, contact the DWP’s Pensions Service.
You will then need to contact HMRC to obtain the required 18-digit code number to ensure your contributions are linked to the correct NI account and years.
Although readers regularly report the challenges of getting through those phone lines, it’s worth persevering because the boost to your lifetime retirement benefits could be very significant.
Ask Steve Webb a pension question
Former pensions minister Steve Webb is the uncle of This Is Money’s Agony.
He’s available to answer your questions, whether you’re still saving, quitting your job, or juggling your finances in retirement.
Steve left the Department for Work and Pensions after the election in May 2015. He is now a partner at actuarial and advisory firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to respond to your message in an upcoming column, but he will not be able to respond to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime phone number in your message. This will be treated confidentially and will not be used for marketing purposes.
If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free pension support to the public. It can be found here and has the number 0800 011 3797.
SteveWe receive a lot of questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you write to Steve on this topic, here he responds to a typical reader question about COPE and the state pension.
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