As an Irish citizen who lived and worked in the UK between 1990 and the end of 1996, you’ve been diligently planning for your retirement. After moving abroad, you continued to pay National Insurance Contributions (NICs) voluntarily to secure a full state pension. However, recent developments have left you puzzled, as your contributions seemingly reached the required amount despite not completing the 35-year threshold.
Let’s unravel this mystery. The calculation of the new state pension, applicable for those reaching state pension age after April 5, 2016, involves two key steps.
Step 1: 2016 ‘Starting Amount’
The starting amount is based on your NICs up to April 5, 2016. It ensures that individuals with a good pension record before the new system’s introduction do not lose out. This starting figure is the higher of two amounts:
- Old System Calculation: Equivalent to a full old-style basic pension, which is currently £156.20 per week for those with 30 years in the system, plus any additional state pension accrued under schemes like SERPS.
- New System Calculation: A flat rate pension, currently £203.85 per week for those with 35 years in the system, after accounting for deductions due to years spent paying reduced ‘contracted out’ NICs.
Step 2: Post-2016 Contributions
From 2016/17 onwards, each year of contributions (including voluntary contributions and NIC credits) adds 1/35 of the full weekly rate, approximately £5.82 per week. However, these additional years cannot exceed the flat rate of £203.85.
In your case, it appears that your 2016 starting figure plus your voluntary contributions from 2016/17 onwards have combined to meet the standard amount. Hence, further contributions won’t increase your pension.
This outcome is plausible if your early working years in the UK generated substantial SERPS entitlement, possibly due to a well-paid job without ‘contracted out’ status.
For those with more than 35 years but not receiving a full pension, past ‘contracting out’ plays a significant role. Years spent paying reduced NICs lead to deductions, resulting in a starting amount close to the basic pension rate of £156.20. While each post-2016 year adds £5.82, it might take more than the remaining years to reach the new flat rate.
It’s important to note that individuals in this scenario have still benefited from the new system compared to the old one, where they might have received just the basic state pension without additional benefits.
For personalized advice, consider reaching out to the Department for Work and Pensions’ Future Pension Centre. They can provide specific details about your pension calculation, ensuring your retirement plans remain on track.
If you have more questions about your pension or retirement planning, feel free to contact Steve Webb, our pension expert, at email@example.com. Steve will address your concerns in upcoming columns, offering valuable insights to support your financial decisions.
Remember, understanding your state pension is crucial for a secure retirement. Stay informed, plan wisely, and enjoy your retirement years with financial peace of mind.