Pensions and National Insurance

I offer this reminder, as I am often asked about the need to pay National Insurance and the most appropriate way to achieve full benefits.  It is easy to check your personal account on line. 

  • the State Pension changed in April 2016.
  • if you reached State Pension Age before April 2016, you needed to have National Insurance contributions or credits for 30 years to receive the full pension.
  • if you reached State Pension age prior to April 2016, the State pension is made up of the Basic Old Age Pension and the Additional State Pension; otherwise known as State Second Pension (S2P), State Earnings Related Pension (SERPS) or the Graduated Retirement Benefit.
  • Those who enter the National Insurance system on or after 6 April 2016, will need to have a minimum of 10 years National Insurance contributions or credits to qualify for a State Pension.
    To receive the full pension, they will need to have National Insurance contributions or credits of 35 years. For everyone else, transitional rules apply. 

Clearly most of us do not rely on the State Pension and the question is how much additional funding is needed to achieve a realistic income at the time you plan to stop earning or reduce your working time.

Most people are shocked once they look at the levels of funding necessary, which means that you can either choose to fund to the desired outcome or delay your plans. Most importantly start early and fund realistically but also take the opportunity to get a realistic forecast.

Pension funding is still the most tax efficient way for all but basic rate tax payers, with Stocks and Shares ISAs used for anyone who is currently a basis rate tax payer. 

One important warning, Cash ISAs give a return less than inflation and the only tax benefit is that the small amount of interest is tax free. 

They do not make financial sense for medium and long-term savings. Inflation is expected to run at about 2.5% in the foreseeable future.  Stocks and Shares ISAs are exposed to market fluctuations but rarely give a negative return in the longer term.