I worked continuously from 1970 to when I retired at 55 in 2010. Therefore, I have more than 40 years national insurance contributions and my state pension has been paid to me since May 2020. Well before this date I obtained an online state pension forecast and was surprised that I had to make even more national insurance contributions to increase my pension to the maximum available to me. I was in a scheme which was contracted out so I am aware that this results in a smaller pension.

After calling DWP, I was told to make the maximum of four years’ NI contributions for the years 2016 to 2020 which I did.  I have, therefore, paid just short of £3,000 voluntarily.

I then read that any shortfall will not be due to non-payment of NI contributions if the full legal requirement of 35 years’ payments has been met, which in my case it certainly has.

On a further telephone call to the Pension Forecast department I was told that it is not just the number of years I had contracted out but also the amount (value) of that contracting out which is based on earnings.  Apparently, my earnings show a large contracted out figure so the department has made an estimation and reduced the amount of pension accordingly.  If this is the case why would paying national insurance contributions for additional years make a difference?

I have 41 years contribution plus four years which I was told to buy and yet my state pension is still only just over £200 per week.

Howard

Rachel Vahey, AJ Bell Head of Public Policy, says:

The state pension has been part of our lives for more than 115 years but has gone through a few guises. The new state pension, introduced for those reaching state pension age after 6 April 2016, aims to pay a single level state pension, currently £230 a week, to those who have built up 35 qualifying years of national insurance contributions.

State pensions before then comprised two elements. A basic amount and an additional earnings-related amount. Pension schemes and individuals were able to contract out of the earnings-related pension (state earnings-related pension (SERPS) and state second pension (S2P)). This meant pension scheme members paid lower national insurance contributions, instead building up an additional pension in their pension scheme. Most people reaching state pension age today will have been contracted out, and this unfortunately can create complexity when working out state pensions.

To calculate the value of someone’s state pension, the DWP works it out as of 6 April 2016:

1. the amount of old state pension – including basic pension and SERPS – that the individual had built up; and

2. the amount the individual would have got under the new rules if they had been in force for their whole working life – a full flat rate pension for 35 years of contributions minus a deduction for past contracting out.

The higher amount becomes a person’s Starting Amount. Added to this is an extra 1/35th of the full flat rate (new State Pension) for each qualifying year earned from 2016-17 onwards.

Both potential Starting Amounts take account of past contracting out. If an individual has been contracted out, then the first figure will include a lower additional pension figure. Under the second calculation, a previously contracted-out individual will usually need more than 35 qualifying years to get the full rate of new state pension.

Those who were contracted out will however receive a benefit from their scheme to take account of any contracted-out years. An estimate of this used to be shown on pension statements as ‘Contracted Out Pension Equivalent’ (COPE) (although it has now been removed as it caused too much confusion) and aimed to give individuals an idea of how much had been deducted from their state pension to reflect past periods of contracting out. The actual amount someone would have got from their private pension could be considerably different to that.

ADDRESSING A GAP IN NATIONAL INSURANCE

If someone has a gap in their national insurance record – because they didn’t pay enough national insurance contributions – then they might be able to pay voluntary national insurance contributions to fill these gaps and reduce any deficit between the Starting Amount and the full rate of new state pension.

As you stopped work at 55, 10 years before your state pension age, you probably will be ‘short’ on qualifying national insurance years. Even though you have been able to pay voluntary national insurance contributions to ‘backfill’ some years, 10 years is a lot to make up and it would have been difficult to completely reduce the deficit between your Starting Amount and the full rate of new state pension.

Finally, as you have been contracted out then, as a consequence, you have built up an additional pension elsewhere in a private pension. It can be hard to draw a comparison back to the state pension, but the amount built up in your private pension could be much higher than the state pension you ‘gave up’.

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