National Insurance credits: government extends the deadline to let you plug the pensions gap

The Department for Work and Pensions (DWP) has confirmed today that it has now extended the deadline for buying National Insurance credits to boost your state pension back to 2006. Could this  potentially be a great way to boost your state pension income with very little risk?

In fact, by spending less than £1,000 today to buy National Insurance credits, you could unlock up to £5,500 in extra income over a typical 20-year retirement period. 

DWP will now “consider” National Insurance credit purchases after the deadline - which was originally 6 April 2023

In most cases, you can get a full state pension if you have 35 years' National Insurance contributions. But, if you don’t have the full amount by the time you stop working, you may be able to plug the gap by buying additional National Insurance credits.

Even if you have a personal pension, most people under-save and underestimate how much they need for a pension, meaning a state pension could be nice to have as additional income.

Those with gaps in their record need to act fast. The rules change officially on 5 April, and technically from then workers will only be able to pay to fill gaps from the last six tax years, which could affect how much they receive in retirement – especially if they won’t be working long enough to make up for lost years. 

But given the phone lines for the Department for Work and Pensions (DWP) have been jammed with calls as people seek to top up their pension contributions, it has taken a more lenient approach to the deadline this year and you now have until 31 July 2023 to plug the gap.

“We recognise how important state pensions are for retired individuals, which is why we are giving people more time to fill any gaps in their National Insurance record to help bolster their entitlement," Vicky Atkins, financial secretary to the Treasury, said.

Here’s what you need to know about purchasing National Insurance credits, and why doing so could be a great way to boost your retirement pot.

Is purchasing National Insurance credits a good investment? 

“Buying back missed years can be a good way to bolster retirement income as just one qualifying year of NI at the standard rate of £824.20 adds up to £275 per year (1/35 of the full rate of the state pension) to your pre-tax state pension – putting the break even point of making those contributions at three years after you start claiming your state pension,” says Alice Haine, personal finance analyst at Bestinvest. 

You’ll make the money back as long as you get your pension for three years. Anything after that would be profit, making it a worthwhile investment as this £824.20 outlay would amount to £5,500 over a typical 20-year retirement. 

If you purchase back five years of NI for £4,121, that will boost your retirement pot by £27,500 - a staggering return on investment of nearly 600%. 

That’s a pretty good return on the initial investment, especially if you’ve got the extra cash and were thinking of investing it in something else. 

Currently, men born after 5 April 1951 and women born after 5 April 1953 can pay to plug gaps in their National Insurance record going back to 2006 thanks to the “transitional arrangements” between old and new state pensions. 

But from 5 April 2023, workers will only be able to buy back missing contributions from the past six years. So if you have any shortfalls between 2006/2007 and 2016/2017, now is a good opportunity to improve how much you will receive in retirement.  

Steve Webb, former pensions minister and partner at consultant Lane, Clark and Peacock, said: “For those who can benefit, investing in state pension top-ups can generate a better ‘rate of return’ than almost any other way of using savings. Someone with 10 missing years could pay out a little over £8,000 to fix the gaps but see a boost of £55,000 in state pension over a typical 20-year retirement.”

Right now, you have until 5 April 2023 to buy voluntary National Insurance credits to plug any gaps between April 2006 and 2016 - but after that, you can only plug gaps going back six years.

“Under normal rules, it is only possible to fill gaps in your NI record up to six years after the year in question. After that point, the year becomes a permanent gap in your NI record and could affect your ability to build up a full state pension. 

This means that 2016/17 would normally be the oldest year which could be filled in 2022/23,” Webb said.

It is worth noting that there are exceptions to this, say if you contracted out for example. If you contracted out of a state pension then you may not be entitled to a full state pension even with 35 years’ National Insurance contributions.

Things to check before purchasing National Insurance credits

The full state pension is currently £185.15 a week, or £9,627.80 a year. You need 35 years of National Insurance contributions to qualify for the full state pension, and 10 to qualify for any state pension. Any fewer than that, and you won’t receive any. 

But people often have to take breaks from work. Whether it’s due to illness, parenthood, travelling or taking care of someone, it’s normal to have gaps in your employment record. 

You can use the government’s State Pension forecast calculator to check if you have gaps in your state pension. This will give you a summary of how much you’re set to receive weekly according to your current and projected contribution level. You can check your National Insurance record if you’re already at state pension age. 

After that, check if you qualify for any benefits during your time out which would make you entitled to a voluntary National Insurance credit, such as Child Benefit or Jobseekers Allowance. 

“Buying voluntary National Insurance credits is a cost-effective way of boosting your retirement income but it’s important to speak to the Department for Work and Pensions (DWP) before handing over any cash as they will be able to help you work out if you can plug the gaps in another way – such as through backdated benefit claims,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. 

“If you were contracted out of the state second pension at any point then this could also affect your state pension entitlement but buying voluntary credits may not boost your income – often when you contracted out your employer would boost your workplace pension contribution so you benefited from a higher workplace pension instead.”

“A final point before deciding to buy voluntary National Insurance is to think about how many more years you are likely to work,” adds Morrissey. “You may have some gaps earlier in your career but if you continue to work then you may still be able to accumulate enough years to get the full amount.”