Topping up your state pension makes sense

Four in ten people newly qualifying for a state pension this month will get less than £168.60 a week

A jar full of saved one pound coins.

For a new pensioner to get a full state pension of £168.60 a week, they must have paid 35 years of National Insurance contributions.

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However, it’s estimated that four in ten people newly qualifying for a state pension this month will get less than that – even though they’ve paid the 35 years of contributions.

These new pensioners have fallen foul of an obscure rule.

If at any time in your working life you have paid into a pension scheme at work that gives you a pension related to your pay, then your state pension will be reduced. How much it’s reduced by is impenetrably complex, but it can be up to £39.40 a week.

That’s because the people who paid into these works pensions were let off paying into the State Earnings Related Pension Scheme (SERPS), which increased the old basic state pension.

As a result they paid lower National Insurance contributions so the new state pension is reduced to reflect that. (Some people paying into a personal pension were also contracted out of SERPS and the same rules apply to them.)

The works pension should in theory replace the SERPS boost that they could have had. However, that reduction in the state pension may be partly earned back. If people affected have been in employment since qualifying for their state pension, and earning at least £118 a week, National Insurance contributions will have been paid, or credited to, their account.

Every full year of contributions that they have paid from 2016/17 will boost their reduced state pension by £4.62 a week – about £240 a year.

If they have paid National Insurance contributions for the full three years from 2016/17 to 2018/19, their state pension will be £14.46 higher. If they’re not working and have contributions gaps in any of those three years, extra payments may be made now.

These are called voluntary Class 3 contributions and are between £733 and £772 per missing year.

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Each year paid will boost the state pension by £240 a year, so the cost will be repaid within three years. The boosted pension will also increase each April by at least 2.5%. This April it will rise by the 3.9% rise in average earnings.