HARD-UP households could end up thousands of pounds worse off in retirement by making a simple mistake.
Deciding to boost your state pension rather than claiming Pension Credit in later life can see you facing an income shortfall.
You don’t get the full state pension if you have gaps in your National Insurance (NI) record, but you can boost it by buying missing years.
However, topping up any missing NI years can make you ineligible for Pension Credit, a Government benefit which tops up your income to around the full state pension amount.
Not only that, but you have to pay to top up any missing NI years.
The price differs for each tax year, but, as an example, if you wanted to top up 2023/2024 it would cost you £907.40.
Meanwhile, the average Pension Credit claim is worth around £3,300 a year, according to estimates by the Government.
It’s also a “gateway benefit”, which means it opens up a host of freebies including a free TV licence, the Warm Home Discount and discounts on your council tax.
The additional perks alone can be worth thousands of pounds a year, which you could lose out on by topping up your NI years and boosting your state pension.
Clare Moffat, pensions expert at Royal London, explained: “If you don’t have any workplace or private pensions and you decide to top up to get the full state pension amount, then you may disqualify yourself from receiving Pension Credit.
“It’s estimated by the Government that Pension Credit is worth around £3,300 a year.
“So, topping up to get the full amount of state pension might then mean you miss out on that money.”
There is no guarantee Pension Credit will still exist as a Government benefit by the time you come to retire.
But, if you are reaching state pension age soon and are on a low income, opting to not top up your National Insurance record could actually save you thousands of pounds in retirement.
If you’re not sure whether you would benefit, it’s worth seeking guidance or advice.
The Government’s Pension Wise service offers free guidance for retirees – visit moneyhelper.org.uk.
Who is eligible for Pension Credit?
Pension Credit is available to people over the State Pension age, currently 66, and on a low income who live in England, Scotland or Wales.
It tops up your weekly income to £218.15 if you are single and £332.95 if you are in a couple.
Your income is worked out taking into account various elements including:
- Your state pension
- Any other pensions you have saved, for instance, workplace or private pension savings
- Most social security benefits, for example, carer’s allowance
- Any savings or investments worth over £10,000
- Earnings from a job
The calculation does not include:
- Attendance allowance
- Christmas bonus
- Disability living allowance
- Personal independence payment
- Housing benefit
- Council tax reduction
The rules behind who qualifies for Pension Credit can be complicated, so the best thing to do is just check.
You can do this by using the Government’s Pension Credit calculator on its website.
Or, you can call the Pension Service helpline on 0800 99 1234 from 8am to 5pm Monday to Friday.
Those in Northern Ireland have to call the Pension Centre on 0808 100 6165 from 9am to 4pm Monday to Friday.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
How much can you get?
There are two parts to the benefit, known as the guarantee credit and the savings credit, and pensioners can be eligible for one or both parts.
Here are the current rates for the tax year:
- Guarantee credit – tops up your weekly income to a guaranteed minimum level. This is £218.15 a week if you’re single and £332.95 a week for married couples.
- Savings credit – provides extra money if you’ve saved money towards retirement. You can get an extra £17.01 a week for a single person or £19.04 a week for a married couple.
You can also get additional Pension Credit if you have a disability, caring responsibilities or have to pay certain housing costs such as mortgage interest payments.
As an example, you can get either £66.29 a week or £76.79 a week for each child you’re responsible for.
How do I apply and how will I be paid?
You can start your application up to four months before you reach State Pension age.
You can make an application on the Government website or by ringing the Pension Credit claim line on 0800 99 1234.
You can get a friend or family member to ring for you, but you’ll need to be with them when they do.
You’ll need the following information about you and your partner if you have one:
- National Insurance number
- Information about any income, savings and investments you have
- Information about your income, savings and investments on the date you want to backdate your application to (usually 3 months ago or the date you reached State Pension age)
You can also get help with the application process through charities and non-profit organisations such as Independent Age and Age UK.
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