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State pension payments alert

About 250,000 people making voluntary National Insurance contributions (NICs) each year should think again, says the government. The advice, posted on the HM Revenue and Customs website, follows proposals for pensions reform announced in May. Extra contributions have been made by people to ensure that they qualify for a full state pension. But if planned changes go ahead, up to £90m of top-up payments this year could prove to have been a waste of money. The same could be true for payments made in previous years. Refunds may not be payable.

Reform

The government plans to reduce the number of qualifying contribution years needed to obtain a full basic state pension to 30 years for both men and women who will reach their state pension age on or after 6 April 2010.

“ You should consider very carefully whether you should delay paying Class 3 contributions until it is clear whether the rules will change ”

Source: HM Revenue & Customs website

At present, women need between 39 years and 44 qualifying contribution years (depending on their date of birth) and men 44 years. A Bill is expected to be introduced in the autumn to legislate for the change. About 250,000 people pay extra NICs to fill gaps in their National Insurance records in order to boost their entitlement to the state pension and other social security benefits. Groups most likely to make these extra payments are older students, those who have travelled or worked abroad, and those have had a career break or been unemployed but not credited with contributions. Voluntary contributions - also known as class 3 contributions - are paid at a rate of £7.55 a week.

Warning

According to the HM Revenue and Customs website, people should take care before paying voluntary contributions.

“ Any decision on voluntary contributions could also impact on entitlement to benefits such as incapacity benefit. If in doubt seek advice ”

Source: Malcolm McLean, Pensions Advisory Service

"Those reaching state pension age before 6 April 2010 will be unaffected by the proposed changes. However if the proposals in the White Paper become law, you may not need to pay voluntary contributions," the Revenue website says.

Those reaching state pension age on or after 6 April 2010 may already have paid enough contributions to qualify for a full basic state pension, making further top-up payments a waste of money.

"You should therefore consider very carefully whether you should delay paying Class 3 contributions until it is clear whether the rules will change," the website warns.

Dilemma

Those who decide to pay the top ups might not be able to get a refund if it turns out they need not have. However, those who delay paying may end up making contributions at a higher rate if it later turns out that extra payments were needed.

Malcolm McLean, the chief executive of the Pensions Advisory Service, is reported* as saying people ought to seek advice before making further voluntary contributions. "People reaching state pension age after April 2010 need to establish from the state pension forecasting service what gaps there are in their record and what their options are for paying voluntary contributions to fill those gaps," he said. "But National Insurance contributions are not just for state pensions. Any decision on voluntary contributions could also impact on entitlement to benefits such as incapacity benefit. If in doubt seek advice."

*Source BBC News