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The state pension is so horrendously complicated that even the most apparently straightforward parts are full of hidden pitfalls. As one Express reader discovered to his dismay.
To qualify for the full new state pension most people need to make 35 years of qualifying NI contributions during their working lifetime.
Not everybody, though. What sounds like a simple target can be more elusive than many realise, as reader Andy pointed out.
When his wife hit state pension age last year she was told she would not get the full amount. That’s despite having paid NI for a staggering 43 years. Understandably, given the 35-year rule, she was shocked.
She was told that she was only entitled to around £153 a week for the 2022/23 tax year, at a time when the full new state pension was paying £185.15 a week.
Andy wants more people to understand the danger and is backed by Stephen Lowe, group communications director at retirement specialists Just Group, who said this is a distressingly common problem.
The root cause is the switch to the new state pension, which is paid to those who hit pension age on or after April 6, 2016.
Many workers will have made NI contributions both under the new state pension and scheme’s predecessor, the basic state pension.
Millions will fall into that category and may be affected.
Under the basic state pension, workers could qualify for top-ups such as the state earnings-related pension scheme (Serps) and state second pension (S2P).
They also had the freedom to “contract out” of Serps and S2P. They paid less NI but pumped more into their workplace or personal pension.
The combination of basic state pension, Serps and S2P made the whole system too complicated, so it was scrapped in favour of the single-tier new state pension in 2016.
Seven years later, we are still in what Lowe calls a “transitional period”, as most people’s NI records span the changeover.
Everybody reaching state pension age after April 6, 2016, will get the new state pension rather than a combination of old basic state pension plus any Serps and S2P entitlement they built up.
However, NI contributions made in years when savers were contracted out do not count towards the new state pension.
Contracting out ran from 1978 to 2016, Lowe says. “Somebody who contracted out for a long period may have more than 35 years of qualifying NI contributinos, but still need more to get the full new state pension.”
READ MORE: State pension sum may be less if you were ‘contracted out’ – check now
Some will be able to make up the full 35 years of NI by carrying on working, but only up to a limit. Once you hit retirement age, you automatically stop paying NI contributions, even if still working.
The alternative is to plug any shortfall by purchasing extra state pension. That’s what Andy’s wife did. She was able to lift up her total to 35 years by making six years of voluntary NI contributions, at a cost of £4,800.
While £4,800 is a lot of money, buying extra state pension is a great deal for most people, as you effectively get your money back within three years and are in profit after that.
Typically, you can only make voluntary NI contributions going back six years, although there is a window of opportunity to make contributions stretching all the way back to 2005.
Andy says plenty of older people who have worked all their lives wrongly assume they will receive a full new state pension when they won’t, and he wants them to be aware the danger.
Stephen Lowe said getting maximum possible state pension is vital, so don’t get caught out by a shock last-minute shortfall. “This is one of the reasons we constantly appeal for people to check their NI records and State Pension forecast. Knowing how much you are going to get and when is the first step to retirement planning.”
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