After reading some of the comments yesterday over at The Matrix Experiment I decided to check out my National Insurance contributions. It’s actually pretty easy; all you need to do is go here:
You’ll need a government gateway ID and account but this is all pretty easy if you have your passport/P60/payslip to hand. I was set up within 5 minutes and suitably surprised with the ease of use of a government service! If you’re already self-employed or doing a self-assessment return then chances are you’ve already got the account that you need.
It turns out that I’m in a better position that I thought! Here is my record at age 31:
So I have 10 years of full contributions, which is more than I’d calculated. This is partly because of 3 surprising ‘Full year’ contributions when I was a teenager – essentially when I was at college. I didn’t know this but I got ‘National Insurance Credits’ at that age, presumably because those in full-time education can’t really earn NI contributions but those who choose to leave can.
In order to claim the maximum state pension at age 67 (currently) I need to make 35 contributions. Thus I have 36 years to make 25 contributions. Easy. I will presumably do that by the time I’m 56ish.
If I don’t pay anything more in, I would still get a state pension of £43.62 a week. Assuming I make the full amount of contributions, this goes up to the full £159.55 (currently).
Where I have incomplete years, I have still contributed something. This means that I am able to send of a cheque to make up for contributions if I so desire.
These are £265, £583, £389, £408. So a total of £1645. So my question is, at what point (if any) does it make sense to pay these and, possibly, is there a reason not to pay these?
The annual pension divided in 35ths means £237.86p. So for each extra year I top up, I get that much extra each year from age 67 (or whatever it turns out to be). If I choose to pay the £1645 to HMRC now then it is worth an extra £951.44 per year.
However, what if I pay that £1645 into my SIPP? Plugging that into HL, assuming an annual charge of 1% total (to include platform fee) and 5% annual growth, by the time I am 60 it would be worth £2440, or as they say at around 4% pa, £91 per year income.
So it’s a case of don’t pay the contributions and at age 60 get £91 per year extra or pay the contributions and get and extra £951.44 per year from age 67.
This seems like a no brainer. Pay the contributions.
However, this assumes that I need to and won’t be working until I am 56. Under my current plan, that would be the case. Or at least I will be working enough to make the contributions. It also means that I am relying on my state pension, which I don’t intend to. Whatever I get at age 67 (or more likely, 70+) is going to be a bonus, not my main income.
I have a few years to decide admittedly, but at the moment I’m NOT going to make the contributions and assume that I will be able to make 26 payments in the next 36 years or hopefully 26 in 26!
Edit: Jason actually goes into more details here on opportunity cost and control over at his blog. He arrives at a conclusion based on a different view of the need for his state pension and his current situation of financial independence. A very good read.
Has anyone else made extra contributions? Do you think it’s worth it?