Mothers 'Throw Away' Their Pension Top-Ups

The Sunday Times

October 15, 2006

Experts fear people who pay extra contributions to ensure they get a full state pension may as well set fire to the cash, writes David Budworth

About a quarter of a million people making voluntary national insurance contributions (Nics) to beef up their basic state pensions may have to wave goodbye to their cash, the taxman has warned.

Each year tens of thousands of people pay extra Nics to make up for time they have been off work or out of the country. Many are women who took a career break to raise children.

But a change to government rules could mean some people have wasted thousands of pounds by paying in more than was needed. They are being warned that there is no automatic right to a refund.

Revenue & Customs has even sent out letters advising individuals to consider suspending the extra payments until the new rules are in force. Here we explain what is at stake.

Why would I consider paying voluntary Nics?

For each year you work in the UK you gain an entitlement to the basic state pension. At present, women need to work for between 39 and 44 years to get the full basic state pension of £84.25 a week. For men the target is 44 years.

People with a broken record can pay voluntary or Class 3 Nics to make up for the years they have missed.

What is going to change?

Ministers want to cut the qualifying period for a full pension to 30 years for both men and women from April 2010.

The proposals are not yet law but the government intends to legislate in the next parliamentary session.

Who could lose out and by how much?

Men born after April 6, 19 45, and women born after April 1950 because they will reach state retirement age after the proposals are introduced, assuming they become law.

If they reach retirement and have paid in more than the required 30 years there is no guarantee that they will get any money back. The Revenue has warned: “You might not be able to get a refund if it turns out at a future date that you need not have paid them.”

Insurer Standard Life calculates that a woman who makes extra contributions on the basis she needs 39 qualifying years and then finds she only needs to have paid for 30 could lose £3,200.

Will anyone benefit?

Carers and women looking after children might find it easier to qualify for a full state pension.

Under the current system you can claim Home Responsibilities Protection ( HRP ) if you are caring for children under 16 or a sick or disabled person.

This cuts the number of qualifying years you need to build up a full state pension, but you still have to pay a minimum of 20 years’ contributions. You get nothing if you don’t have a minimum 25 per cent of the years needed to get a full pension. The government has suggested abolishing this minimum requirement and replacing HRP , although how it will work is unclear.

What should I do?

If you think you might overpay it is worth halting contributions, said Mike Warburton of Grant Thornton, an accountant.

He said: “I would suggest holding off until it is clear the legislation is going to change. If the rules remain the same you should be able to make up the contributions you have missed.”

You can pay extra contributions for the gaps in your record going back to 1996. After 2009 you will be allowed to backdate for six years.

How much does it cost?

This year it costs £7.55 a week or £392.60 a year to buy back a year’s basic state pension entitlement. The required payment tends to go up in line with inflation each year.

How do I know whether I need to make up for lost time?

You should get a pension forecast from the pension service website (pensionservice.gov.uk ) or by calling 0845 300 0168 .