Should I Make Voluntary National Insurance Contributions?

Wondering if you’re retirement ready?

Take our FREE Expat Financial Assessment.

This is the second blog in a 2-part series about the UK state pension. In the first blog we discussed how a non-UK resident can qualify for UK state pension and how to determine your benefits. You can access the first blog here. In this second blog we will address voluntary National Insurance contributions and how you can utilize them to boost your entitlement.

Should I Make Voluntary National Insurance Contributions?

First of all, what are we talking about?

To receive the maximum UK state pension an individual needs 35 years of qualifying contributions (see part 1 of this blog series). If you have less than 35 years and more than 10 (which is the minimum to qualify) then you will receive a pension proportional to the number of years you paid in.

People with some qualifying years, but less than 10, may want to make voluntary contributions to bring their contribution record up to the minimum of 10 years needed for a reduced pension. When a person has more than 10 years but not the full 35 years, they may wish to pay voluntary contributions to boost their pension entitlement.

About National Insurance Contribution Classes

There are four different classes of national insurance contributions. Of those only Class 2 and 3 relate to voluntary contributions.

Class 2 contributions are for those expats living and working abroad “but only if you worked in the UK immediately before leaving, and you’ve previously lived in the UK for at least 3 years in a row or paid at least 3 years of contributions.” Class 2 voluntary National Insurance contributions for 2022/23 are a mere £3.15 per week (£163.80 p.a.).

Class 3 voluntary National Insurance contributions for 2022/23 are a pricier £15.85 per week (£824.20 p.a.) and are for those expats living abroad but NOT working “but only if at some point you’ve lived in the UK for at least 3 years in a row or paid at least 3 years of contributions.”

For more information on voluntary contributions, visit this link.

If you are considering voluntary contributions, the first step is to check your national insurance record here. You should not make voluntary contributions if you have more than 35 years already.

There is usually a time limit of 6 years, meaning voluntary contributions normally have to be paid within 6 years of the end of the tax year to which they relate.

There are several ways to make class 3 contributions, including monthly direct debit. For more information, visit this page.

Should You Make Voluntary National Insurance Contributions?

The short answer is probably yes.

Putting aside the inevitable American complication for a moment (WEP – see below), in 2022/23 making a voluntary Class 3 contribution will cost you £824.20 to “buy” a year. And in 2022/23 the full new State Pension* is £185.15 per week, or £9,627.80 p.a. and to secure this you need 35 years.

*Pls note that the new State Pension is different to the basic State Pension and only applies to men born after 6 April 1951 and women born after 6 April 1953.

So, paying £824 in 2022/23 will buy you a future income in today’s terms of £275 p.a. (this is inflation linked, so you will get the future equivalent of this). This is clearly a good deal!

And this is assuming you make Class 3 contributions. If you are eligible for the much lower Class 2 contributions – which you can determine by contacting HMRC – it’s a no brainer (not something we say lightly)!

There is a caveat: all this could change by the time you reach state pension age. Governments are famously struggling to meet their retirement benefit obligations and it’s likely things will change and benefits get watered down and/or delayed. That’s just a risk you have to bear in mind.

Please note: if you are already receiving state pension benefits, then you are no longer permitted to make voluntary contributions.

If You’re a British Expat in America, Be Aware of WEP

Here’s the rub for us in the USA – the “Windfall Elimination Provision” (WEP). I’m not going to go into great detail on this now (please see our previous blog post) but basically, if you have less than 30 years paying into Social Security and you qualify for a UK state pension then the SSA will reduce your Social Security benefits.

Here’s the rub for us in the USA – the “Windfall Elimination Provision” (WEP). Simply put, if you have less than 30 years paying into Social Security and you qualify for a UK state pension then then your Social Security benefits will be reduced. If you wish for more details, please see our blog post about WEP.

And the fewer years you paid into social security, then the higher the penalty.

If you are eligible for a UK State Pension and will be penalised under WEP then it is still likely in your best interest to maximise your UK State Pension.

The WEP penalty is capped at a maximum of 50% of your UK state pension. So by increasing your UK State Pension entitlement you could increase your WEP penalty, but you will also increase your overall combined social security + UK state pension income. It is precisely because of this cap that you should probably make voluntary contributions.

Here’s another caveat. This can be exacerbated or reduced by the foreign exchange (FX) rate at the time you become eligible for your UK State Pension.

If You Ever “Contracted Out”

If you “opted out” when you were a member of UK company pension scheme then you may find that your contribution record does not match your accrued pension. This is because the shortfall will effectively be paid by the company pension scheme. You may be able to catch up and remove or reduce the shortfall.

Start by checking your National Insurance contributions record here. We heard from someone who had a full record (i.e. 35 “full” years contributions) and yet their accrued pension wasn’t the maximum. When we queried this, we were told that it was a result of having contracted out earlier in their career and that they could make it up to the maximum by paying several move years of class 2 contributions.

Additional Resources:

How to Top Up Your UK State Pension

In Conclusion:

Yes, you should probably make voluntary national insurance contributions, but your effort may be diluted by changes in the foreign exchange rate between the time of making the contributions and the time of drawing benefits. Also, it can be complicated by the fact you reside in America and will be in receipt of Social Security. If you are going to have over 30 years’ worth Social Security of contributions then you can ignore this, but if you won’t then do a little bit more homework before pulling the trigger. You’ll probably still be better off, but maybe not as much as you expected.

Wondering if you’re retirement ready?

Take our FREE Expat Financial Assessment.

Plan First Wealth is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.