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Maximising your State Pension benefits

By: Graham Walker Date: 16 November 2016
Category: Lovewell Blake Financial Planning

With effect from April 2016, the new State Pension benefit was set at a flat rate of £155.65 per week (£8,093.80 per annum), however not everyone will receive this amount, especially if they were ‘contracted out’ at some point in the past.

What was contracting out?
Contracting out was a system in which employees gave up their right to additional State Pension, firstly in the form of the State Earnings Related Pension scheme (SERPs), then from 2002, in the form of the State Second Pension (S2P). In return, both workers and their employers paid reduced national insurance.

If you were contracted out, you may not be entitled to receive the maximum State Pension amount. If you are unsure if you were contracted out you can apply for a State Pension projection by completing and submitting a BR19 form.

What can I do if I have a shortfall in my State Pension amount?
The State Pension projection should provide a figure on the maximum pension that you can attain before retirement. If you do have a shortfall you could make additional National Insurance contributions (NIC) to minimise the difference.

Please note, if you are far enough away from retirement you may still be able to achieve maximum funding through normal contributions, in which case additional contributions would be unnecessary.

When looking at any shortfall in your NIC record you can take into account up to six years of contributions (at the time of writing 2010/11), however there are certain reasons you may not be eligible to pay any extra:
  • if you were over state Pension age in a particular year
  • eligible to pay ‘married woman’s rate’ of NI
  • exempt from paying NI as a self-employed person with a low earnings exemption certificate

The rate for additional contributions is £14.10 per week (or £733.20 per annum) and can be made either as a one-off payment or by monthly direct debit. You also have the flexibility to make contributions for entire missing years, or just part years.

If you make a full year of contributions you could purchase £206.79 of additional State Pension, every year meaning that you would recover the outlay in approximately three and a half years. This effectively equates to a 28% annuity rate for an inflation-linked pension.

We would strongly recommend that you consider this course of action if you wish to maximise the amount of state Pension you wish to receive.

If you have any questions arising out of this article or any other retirement or financial planning issue, please contact Graham Walker.
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