How to top up and grow your state pension: Steve Webb’s golden rules

Buying state pension top-ups can give a big boost to retirement income, but people are often baffled as to whether this will be worth it for them personally.

You’ll need to check your state pension record to find out how much you’ve already paid into one, then decide if you need to top up and, if so, in which years to fill in the gaps or buy from scratch.

The Government has launched a new online top-up service to help people do this more easily. This follows a flood of complaints that the system is confusing and takes too long to process payments.

The website allows people to check which years are best to top up and buy on the spot, but they will still be able to call and pay offline if they prefer.

> Use the Online recharge service here or go to the HMRC app.

At this time, the usual six-year period for acquiring voluntary state pension top-ups has been extended until 2006/07, a special arrangement that was due to expire on 5 April 2023.

After a phone failure last year, the offer was extended twice and is now April 5, 2025.

How much does it cost to increase your state pension?

A year of voluntary National Insurance contributions costs £824.20 at the 2022-2023 ‘Class 3’ rate, or less if you complete a partial year.

Costs were frozen until April 5, 2025, despite there being a 10.1 per cent increase in the full state pension in April 2023 and an 8.5 per cent increase in April 2024.

The fee for 2023-2024 and 2024-2025 is £907.40. The government-backed MoneyHelper website has more information about How much do state pension top-ups cost? for different years.

Self-employed workers pay different types of contributions to the IN and the system for them was reviewed starting in April.

This is Money columnist and former Pensions Minister Steve Webb has all the details on how self-employed workers can create a state pension record.

Are state pension top-ups profitable?

Older people received an 8.5 per cent increase in their state pensions from April 2024, making up the new headline rate. £221.20 per week – up to £902 a year up to around £11,500.

“In the best of times, increasing your state pension can be a very cost-effective way to achieve a higher income in retirement,” says Steve Webb.

“In many cases this will increase state pension entitlement by 1/35 of the normal rate.”

That works out to £6.32 a week, or around £329 a year, or almost £6,600 over a 20-year retirement (before tax). for an initial outlay of £824.20 at the 2022-2023 exchange rate.

Webb says: “The cost of top-ups has more or less frozen due to all the deadline delays, while what you get for that fixed payment has increased by more than 18 per cent in the last two years, so They are even better value.

‘Now a little more is taxed, which changes the calculation slightly, but not much.

“Even if we return to a world where the cost of Class 3 NICs rises with inflation, the state pension will always rise by inflation or more, so the balance will likely continue to shift towards top-ups being increasingly better value “.

“But of course, in the future you will only be able to go back six years, so the next 12 months are really a golden opportunity to fill those older years, as long as they help.”

Webb He adds that there are two groups for which recharges may be of special interest. Firstly, public servants who retired early and were members of an outsourced professional pension scheme which reduced their state pension below the maximum amount.

And secondly, self-employed people who might have gaps in their NI record and be able to go back to any year since 2006/07 to complete it.

Steve Webb’s golden rules for buying state pension supplements

1. Make sure you get the credits you are entitled to before paying voluntary NI for a particular year.

For example, grandparents who are not of retirement age can get credits towards their state pension if they are caring for a grandchild, allowing the child’s parents to go out to work.

As NI credits cost nothing, you should always claim what is available for free before paying voluntary NI for a given year.

2. Whether or not it makes sense for a given individual to recharge depends on their individual circumstances.

You should always start with check your state pension record on the Government website.

This may tell you, for example, that you are already due to receive the maximum state pension and therefore do not need to make any voluntary contributions, even if you have some gaps in your record.

Filling in the blanks for certain years, particularly those before 2016/17, may sometimes have no impact on your state pension, particularly if you were employed and have already paid in 30 years as of April 2016.

3. Some years may be cheaper to cover than others. If, for example, you worked part of a year, you may be able to complete that year more cheaply than completing a year that was completely blank.

4. If you can, fill in the gaps with the Class 2 rate, as voluntary NI for the self-employed is much cheaper than for employees – £179.40 per year, instead of Class 3 contributions at £907.40 per year, in the years 2023-2024 and 2024. -2025 rates.

If you were low-income self-employed in a particular year and have a gap on your record, you should be able to pay at the Class 2 rate for that year, saving you money.

The system for creating a state pension register for the self-employed changed from April 2024.

Steve urges all freelancers: check your state pension record now.

He says: I’ve lost count of the number of times I’ve heard of self-employed people reaching retirement only to find big gaps in their NI record.

‘This often turns out to be related to periods where your accountant was dealing with these matters on your behalf and simply assuming that everything was in order, when in fact it was not.

“Unfortunately, it is the responsibility of each individual to ensure they have paid the correct amount of National Insurance and it may be difficult or impossible to put things right long after the event.”

5. People expecting to receive benefits in retirement may find that their increased state pension is recovered by a reduced pension credit or housing benefit.

6. Always check before handing over money. The rules are complex and sometimes it is possible to fill a gap that has no impact on your final pension.

How much is the state pension now?

The full state pension is £221.20 a week, an increase from £902 a year to around £11,500 from April 2024.

The basic rate is £169.50 per week, rising by £692 a year to around £8,800.

But people on the basic rate also receive significant top-ups, called S2P or Serps, as long as they have obtained them earlier in life.

People who have taken out S2P and Serps to pay less into National Insurance over the years and retire after April 2016 could receive less than the new full state pension.

Workers now need to have 35 years of contributions to get the new fixed-rate state pension, compared to 30 years of qualifying National Insurance contributions to get the old state pension.

But even if you paid in full for 35 years or more, if you contracted for a few years, you could still reduce what you get.

Everyone has the option of deferring their state pension to receive more in their later years.