Pension Planning – The Missing Years

Missing out years of work can seriously damage your pension. Not just your workplace pension but also your state pension. Worse, if we are not getting as much pension as we’re entitled, it means we may not be in such a strong position to help our children, with additional needs, when they need us most.

Each week I try to keep this blog as international as possible, but this week it is UK centric because I can’t speak about other pensions systems specifically. Sorry folks!

Sarah, in this week’s podcast Perseverance Pays Off, mentioned how she gave up work for several years to help Jacob in school, and as a consequence of that she would have missed vital ‘Qualifying Years’ to her UK state pension.

There are a few simple dos that can change the way you live 20 or 30 years from now, but you have to take control and action this year. Missing Qualifying Years – actual years you paid National Insurance in any given tax year – is a problem we can all face if we take a career break to study, take time out to have children, or return to the UK after a prolonged period abroad. I’ve spent around 15 years abroad, and so I’ve had to go through the following process. When I retire, I have calculated I will have just enough Qualifying Years to receive a full state pension, but only just by the skin of my teeth!

So why is knowing I will get a full state pension so important? Because no other pension fund will give you the same return for such low contributions. The amount of money needed in a private pensions pot to pay a pension of £159 per week is enormous. To have saved that kind of pension pot into a private pension would take a great deal more than the national insurance contributions required by the state pension. It is by far the best pension I will ever get.

Ok, the government is raising the retirement age, and when you retire does depend on what year you were born. In fact, for me, because they have raised my retirement age by a couple of years, it means I will be able to get enough Qualifying Years. But hey! we are all living longer, so working another couple of years probably won’t kill us, but it would send the country broke if we all expected to continue to retire aged 65 and all lived until 95.

So there are 3 things we all need to know, and 3 things we should all do.

3 Things We Need to Know
1. A full UK state pension is £159 per week (at the time of writing 2017)

2. Qualifying years: 35 is the target
To get a full state pension you need 35 Qualifying Years before you reach your pension age. These don’t need to be consecutive years. You just need to have contributed to the system for that amount of time.
This means if you retire with only 32 Qualifying Years, your pension will be a proportion of the full state pension. For example 32/35 x 159 = your pension.

3. National Insurance Contributions buys the Qualifying Years
To get a Qualifying Year, you need to have paid a minimum amount of national insurance in one tax year. National insurance is a tax on your salaried earnings. You don’t need to earn a great deal to have paid the minimum amount. For the most part, depending upon circumstances, it is around £8,000 per year.

3 Things We Need to Do
1. Get a pension forecast
Go to the Department of Works & Pensions website www.gov.uk/new-state-pension.

First, you can find out what age you can retire by clicking on State Pension Age. Click on Start Now and put in your date of birth. Answer the questions and you will get at what age you are eligible for the state pension.

Second, you can click on Forecast or Statement of how much State Pension you may get. This will give a prediction of your pension when you retire. Click the Start Now. You will need a Government Gateway log in which takes about 15 minutes to set up. Needless to say this can all be done in the written form, but it does take a little longer than using the website – which is excellent by the way. Tax is moving on line completely soon, and so a government gateway log in is something we will all be using soon.

Once you do this you will then be able to find out how much state pension you can expect to receive when you reach pension age based on you contributing for 35 years.

You then need to think about how many more years you have before retirement (stated as the earliest date you can get your State Pension) and add them to your current number of Qualifying Years. Hopefully that will equal 35. If it does, congratulations! You don’t need to do anything.

2. If you are not on target for 35 Qualifying Years, top up
If you have had break from work it will also tell you what your state pension will be if you do not make up for those years you were not paying national insurance contributions.

Simply click View Your National Insurance Record. This will  show you which years you paid your full contribution of national insurance and where there are gaps. You can also click on View gaps only to see only the years where you do have gaps. If you click on  View details you will then get the shortfall amount and what you need to pay in voluntary contributions to plug that gap.

The forecast gives information on how to top up your pension. What happens is for those years you haven’t contributed enough, it will tell you how much you need to pay to buy that year for your pension’s Qualifying Years. To buy a Qualifying Year doesn’t cost that much really, especially when compared to what you will get for it after you retire. Buying these Qualifying Years will be some of the wisest money you ever spend.

It is, however, very important to note that normally you can only add voluntary contributions to plug these gaps for the last six years. So if you do have any gaps in the last 6 years it is important to take action now.

3. Use your knowledge to spread the word
Be wise parents on this one and explain to your children how the pension system works, even if they don’t have additional needs. One day, though they may not think of it right now, they will also retire. There’s nothing worse than being a little bit off the contributions threshold and not getting enough Qualifying Years. Highlight to them the importance of making sure they get a full state pension.

In Brief
Don’t write off the State Pension just yet. The system is not completely broken, despite what the doomsayers cry. If there wasn’t a State Pension, there’d be millions on the streets living in poverty, and so the government simply can’t get rid of the State Pension just like that. All it can do is push the age up which you receive it. But the chances are that you will still receive it for more years than your grandparents did, even if you do have to work until 67, or 69, or 75, or whatever age they move it to for you.

Catch up on missing Qualifying Years if you’ve taken time out of work to have children, study, travel or whatever. Clicking on the website and paying the top up will change your future comfort more than just about anything else you will ever do. Don’t let this moment slip without taking action. If you don’t get as close to a full pension as possible, it could take money away from your child’s future.