Gordon Brown's big pensions sale

If you haven't made enough NI contributions for a full state pension, there's a cheap way of topping them up. But you have to be quick to take full advantage. Ruth Jackson explains how to boost your retirement income - and why you may not want to.

For sale: a £35,000 pension in return for a £421 investment. Deal ends 6 April.

At first glance it appears that Gordon Brown is having a fire sale on pensions. But don't get too excited - it's a bit more complicated than that.

The deal is that you can buy back missing years of your National Insurance (NI) contributions to build up the number of years needed to qualify for a state pension, or to boost the amount you get.

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Maybe you missed out on years because you were off work raising children or caring for a sick or elderly relative. Whatever the reason, 70% of women and 15% of men aren't entitled to the maximum state pension, according to Lovemoney.com.

Up until April 2010, a man will need tomake NI contributions for 44 years prior to turning 65 in order to receive a full state pension - currently £90.70 a week. For women, the minimum is 39 years before they reach the women's retirement age of 60.

If you have made NI contributions for a shorter time than this you will still be eligible for a reduced state pension. However, you need at least ten qualifying years if you're a woman - 11 if you're a man - to receive any pension at all. In return for this minimum, the government will give you 26% of the full basic state pension. That works out as £23.58 a week at present.

Now, if you don't have enough years' contributions, you can top them up voluntarily. The current price of a year's top up (known as Class 3 NI contributions) is £421.20, but this rises to £626.20 from 6 April this year.

This is where the deal mentioned above comes in. If you are only one year away from the entitlement level for a basic state pension - i.e. you have nine or ten years (depending on your sex) of NI contributions built up - and you are about to reach retirement age, you can effectively buy yourself an annual income of £1,226.16 for £421.20. Buying the equivalent annuity would cost a 60-year-old woman £35,240, points out John Greenwood in The Daily Telegraph.

Sounds like a no-brainer - and if you're in this very specific situation, it is. But should other people top up their state pensions before the 6 April deadline?

Don't get your chequebook out just yet

Before you decide to shell out to boost your retirement income, check that you really need to.

For a start, the rules change after April 2010. The number of qualifying years required to receive a full state pensionwill fallto 30 for both men and women next year. There will also be no minimum level of NI contributions - each qualifying year, even just one, earns you 1/30 of the full state pension. It's also worth noting that the retirement age for women will start rising in 2010 too, to be in line with men at 65 in 2020.

So do you need to buy back missing years now, or are there enough years between now and retirement age in which you can make up the deficit? Unless you're very close to retiring, it's likely that you don't need to top up at all.

You may have more NI years than you think

Another thing to consider is whether you qualify for Home Responsibilities Protection (HRP). This was introduced in 1978 as a way to address the pension deficit facing stay-at-home mums and carers. HRP can reduce the number of NI contribution years needed to qualify for the full basic state pension, but only to a minimum of 20. Those who qualify are parents who don't work and receive child benefits for children under 16, plus carers and registered foster carers. Find out more about whether you qualify for HRP at the Pension Service.

The rules on HRP are changing in April 2010. Under the new rules, rather than receiving a reduction in the minimum number of NI contributing years, qualifying parents and carers will receive a weekly NI credit. Previous years of HRP will be converted into credits in April 2010.

So once again, ask yourself if you need to buy NI contributory years, or whether you will earn them in the future via credits.

And is there any point in topping up your state pension?

There also may be no point in topping up the state pension. If you are facing a low income retirement you may be eligible for Pension Credit. This is an extra pension allowance created to make sure no pensioner receives less than £124.05 a week total income. So if you are unlikely to have any source of income other than the state when you retire, there's no point spending your money now on NI top ups. To find out more, visit the Pension Service website.

So who should buy extra years?

If you are close to retirement age, and you are short of qualifying years, it may well be worth looking into. (For more help working out what your state pension will be, you can get a pension forecast at the Pension Service).

But even if this is the case, as Jane Baker points out on Motley Fool, if you are in poor health "you may want to think twice before buying missing years" as "you may not survive long enough to make it worthwhile."

For everyone else, it's probably better to wait. Thanks to the current economic crisis our government is more indebted than ever, and therefore is likely to want to claw back as many outgoings as possible in the coming years - whoever is in power. This could mean a cut in the state pension payout - which would be infuriating enough without knowing that you gave them extra money. So if you aren't due to retire soon, it's worth holding onto your cash and waiting to see how the land lies nearer retirement age. Find out here at what age you will be entitled to a state pension (according to current plans anyway).

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Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.