UK State Pensions

A surprisingly good deal?


This post is for UK nationals only, I’m afraid 🙂

Recently I’ve been reading about the UK social security system, particularly the New State Pension.

This is thanks to Gareth S., who I owe an apology to: he tried to tell me about this several times, and I didn’t listen because I was stubbornly clinging to my assumptions. Something must have sunk in though, as it got me going in search of more info.

​This leaflet explains the State Pension.
This leaflet explains social security abroad.

In short, you can pay voluntary contributions (currently £14.10 per week) towards the UK state pension. If you pay in for ten full years you will be eligible to receive a state pension on reaching retirement age. The state pension is currently (£4.45 x # of years, maximum £155.65) per week.

So if you paid in for ten years, you would receive £44.50 per week under the current system.

To get the full pension you would have to pay in for 35 years.

This is a surprisingly good deal, and is basically an unbelievably favourable annuity. The real benefit is a kind of longevity insurance. Because you will receive the pension for as long as you live, it protects you from running out of money if you live ‘too long’.

If you buy an annuity from an insurance company, the best rates are currently around 4%. In contrast, paying into the UK state pension gives you a rate of over 30%.

If you have already paid into the UK scheme, it is pretty much a no-brainer to continue paying in voluntarily to boost your pension. Even if you have never paid in, like me, it may be be worth doing so to diversify your retirement income and lock in an extremely cheap annuity.

Of course, all of this depends on whether the UK state pension scheme will continue operating in its current form, whether the rules will change in a significant way, whether the pound is worth anything in the future, and a host of other assumptions.

And there might be another benefit. Japan expects residents to declare all worldwide income and pay taxes on it. There are harsh penalties for not reporting overseas assets over 50 million yen in total. Paying into the UK pension system is one way to invest abroad without falling foul of either of these.

What do you think? Great deal or not worth it?
​

41 Responses

  1. I believe if you live outside the EU, the UK state pension will be a fixed rate and will not increase with inflation. unless you return to the uk.

    1. Yes, the rate will be fixed from the date you start receiving it. And people living in the EU may well be in the same boat after Brexit.
      There are horror stories now of 90-year olds living on 6 pounds a week or something equally ludicrous as they have been receiving it for thirty years with no inflation raises.
      The gamble is that we have no idea what the pension system will look like in (in my case) 28 years’ time when I will be eligible to receive it. None.
      But for 14.10 a week it might be a gamble worth taking.

      1. Apologies if I this is covered in the links already posted, but according to this page (https://www.gov.uk/voluntary-national-insurance-contributions/rates) someone who is living and working abroad is entitled to pay Class 2 contributions.
        This page (https://www.gov.uk/voluntary-national-insurance-contributions/rates) states that Class 2 contributions are 2.80 per week. The 14.10 per week seems to be payable in respect of Class 3 contributions, which you can only pay if living abroad but not working…

      2. Interesting. Not sure how they would work if you live abroad. If you qualify and can pay them obviously it would be better to pay 2.80 a week instead of 14.10 a week 🙂
        I think I read somewhere that class 2 contributions would be phased out soon, but if you can pay them in the meantime…
        https://www.gov.uk/government/consultations/consultation-on-abolishing-class-2-national-insurance-and-introducing-a-contributory-benefit-test-to-class-4-national-insurance-for-the-self-employed/the-abolition-of-class-2-national-insurance-introducing-a-benefit-test-into-class-4-national-insurance-for-the-self-employed

      3. This prompted me to call HMRC, who were surprisingly helpful. They advised me to apply to make voluntary contributions using form CF83 (at the end of this leaflet: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414910/NI38_CF83.pdf). I was told to apply to pay Class 2 contributions (2.80 per week) in the first instance and that they would decide on reviewing my application whether I was entitled to this or whether I would have to pay the higher Class 3 contribution.
        Thanks again for bringing this to my attention!

    2. If you are going to receive the state pensions in Japan then it will be uprated with inflation or even better the so called triple lock either inflation, earnings or 2.5% a very good deal. However the increase is not available to most commonwealth countries where most British pensioners live.

  2. I didn’t know about that, I’ll have to check it out. It does put retirement planning in a different light

    1. Well, it makes the current system look a bit less fantastic. I can’t see the current system surviving though, so we’ll see what it looks like in 30-60 years time (when I’d be claiming).
      The pound may be much stronger than the yen by then though, which would again make it more attractive, or weaker.
      I’ve reconsidered though, and think this is worth a shot to me. Trying to find my NI number now 😉

  3. I have been paying into the voluntary class 2 pension in the UK for 38 years. Been working in the Middle East, Indonesia and Japan. I am currently paying about 150 pounds a year into the system. I have had confirmation that I will qualify for in the region of 149 pounds a week when I retire. For people resident in Japan, that amount does not increase yearly. I continued paying in all these years as I was unsure where I would end up. It is difficult to say if this is a good deal or not. If I do return to the UK, which is unlikely, the fact that I have made payments into the system may help with access to the NHS. I am a tax payer in the UK, as I have income from rented property.
    The info on this site is really useful and I wish I had had access to and thought more about it when I first came over here. It is interesting that people are considering Japan as a place to put down roots/retire in. I have a job and my own place here and Japan seems a much better bet than previously.

    1. Hi Stuart
      Looks like you are in good shape! Wish I’d been paying into this for the last sixteen years…
      600 pounds a month is better than kokumin nenkin here, and the payments are much less.
      I like it here too. Right now we’re planning to have a base in Japan and take long trips abroad once or twice a year. The only thing that troubles me is seasonal allergies!

  4. Hi,
    If you have worked in the U.K. and paid national insurance, it is worth asking for a pension statement.This will tell you how many years contributions you have made and the amount of state pension you will receive.
    If it is possible to top this amount up to the full amount, it might make a nice little nest egg when you retire.
    Has anyone considered what will happen to this pension if you pass away leaving a Japanese spouse??

  5. Hi JM
    That’s great advice, and a good question. I can’t find anything online about survivor benefits or pension for a non-British spouse living abroad -this might be best addressed by someone asking the pension service.
    Please report back if you discover anything more on this!

  6. If you register for the HMRC’s online “Gateway” service, you can see a summary of your state pension payments online, together with a breakdown of what you paid each year and an estimate of what you will receive when you reach pension age, and other details.
    I did this recently and was pleasantly surprised to discover that I have already paid for ten years (I though it was less than that), and that I am already eligible for an estimated pension of £44.47 a week.
    I am serious considering starting to pay contributions, as well as making some back-payments to fill in some unpaid years.

  7. Yes it is definitely worth paying voluntary NI to protect your state pension. A few more things to note are:
    -I think the time you spent in full-time education also count towards how many years you have paid – so almost everyone will already have contributed something.
    – You can backpay for up to 6 years I think
    – If you want to pay the cheaper class 2 contributions, you have to have been working / or on jobseekers allowance just before you came to Japan
    – Currently the pension is ‘frozen’ in Japan so it will not increase with inflation, but this is currently being fought

  8. Hi,
    I’ve been working for 20 years, most of them in the UK, and I’ve checked on HMRC site that I’d be entitled to ~£70/w.
    My wife is Japanese and she’s working in UK as well at the moment. But we don’t know much about pensions either here or in Japan.
    Do you know if there’s any kind of agreement between both countries? ie, if we’re working in UK but want to retire in Japan, would we get the pension in UK (as detailed in the HMRC site) or would we need to do some kind of paper to stop getting the pension in UK and start receiving a pension in Japan instead?
    And if they’re different systems, and we’ll be getting a pension in UK even when retiring in Japan. Do you know if we can do some kind of paper and pay something in the Japanese system now even when we’re not living there and I’m not even Japanese (we’re near our 40s) so that when we retire we could get a pension in Japan as well?
    Thanks,
    Michael

    1. Hi Michael
      If your wife is working in the UK, she may also qualify for a UK pension. At the moment the UK pension seems to be both better than the standard Japanese kokumin nenkin, and in better shape.
      There is a UK-Japan treaty, but my understanding is that it just ensures you don’t have to pay into both systems at the same time. It doesn’t allow you to transfer credits.
      I don’t believe non-residents can pay into kokumin nenkin, but it may be worth looking into (but also look at projected payouts and consider whether it is worth it).
      You could receive your UK pension(s) in Japan, but currently they would not increase with inflation (or the triple lock) meaning they may lose value over time.
      Hope that helps!

      1. Thanks, I just noticed the reply.
        I see, yes, it does help. I guess for now then, we’ll just carry on paying what we have to in UK, and in the future we will see the kind of agreements the countries have with each other or how we get the pension from UK to Japan (if needed). Quite complex the whole subject…

      2. Just to add to this I also enquired about double coverage. It’s as BenS said – Japanese residents are required to pay Health Insurance and Nenkin, so there is an agreement that the UK does not require you to pay National Insurance. But the Nenkin doesn’t count towards National Insurance, so you need to pay NI voluntarily if you want to keep your UK coverage increasing.

  9. Not sure ow many people read these old comments, but I can provide a personal update on this.
    I called the HMRC last year and inquired about making voluntary pension contributions, including back-payments.
    I was advised to download and send an application form together with a letter explaining my situation in detail (my employment history since coming to Japan etc.)
    Like ARo, who posted above, I was told to provisionally apply for class 2 payments, and that they would decide based on my station if I should pay class two or class three.
    I sent my application late last year and just recently got a reply from them. The two interesting things to note are:
    1. I was eligible for the very cheap class 2 payments. This really surprised me, as I am earning decent money here in Japan. I have no idea how they worked it out as there was no explanation, but they have all my details, including my employment details. I have arranged for the contributions to be paid by direct debit from my UK bank account–they are debited in two lump sums per year of just over £70.
    I was told that I could make back-payment for the past ten years’ contributions. The letter explained that the length of time for which you can make back-payments and the rates of the payments has been has been “frozen” due to the recent changes in the pension system (increase of minimum qualifying years for a full pension increased from 30 to 35, etc.). So, I can pay back until 2006. The back payments are also at the class 2 rate (I was already in Japan at that time), so approximately £140 per year.
    I am planning to pay off all of the ten years’ back-payments and start paying from the current year by direct debit. I already have ten years paid from before I moved to Japan, so that will mean that I will have twenty years under my belt–another fifteen to pay (currently at an amazingly cheap rate) to get a full pension when I come of age.
    It does seem like a really great deal!

  10. That is an unbelievably good deal. Hopefully my application will come through in a similar manner. Blog post once I get a reply!

  11. Thanks for this. I also recently applied. Communication is via snail mail only so it took more than a month to hear back.
    It appears if you were working for 3 years before you left the UK, and you are working in Japan, you are eligible to pay class 2 payments, which are only £2.80 per week. The figure you quote is for the class 3 payments.
    If you are unemployed, you have to pay the class 3 payments. I was unemployed for a few months after coming to Japan, for those months I got class 3, the rest class 2.
    It does seem counterintuitive. Why is the working rate so cheap compared to the unemployed rate? I read on another blog that historically class 2 rates were much closer to class 3 rates. Class 2 is also used for self-employed UK residents, up to a certain amount. After that amount, self-employed residents pay class 4 contributions. At the time the class 2 rates were lowered, the class 4 were increased. But as non residents paying class 2, we are not required to pay class 4. It seems like a very lucky oversight caused by overseas residents getting lumped in with low income self-employed UK residents. I’m not sure how long it’ll last, so now is probably a good time to get covered!

    1. Yeah, the amount we have to pay seems a little ambiguous. I applied several months ago and haven’t heard back yet, but crossing my fingers that I’ll get to pay the cheaper rate (until they get rid of it) and also back pay as many years as possible.
      Seriously, any Brits out there that aren’t doing this already, get on it before they close this loophole 😀

      1. Did you ask for the cheaper rate? I.e. did you tick the Class 2 box? From my understanding, class 3 gives slightly more benefits, so you can choose to pay the higher rate. If you didn’t ask for class 2, you might not get it. But you can always ask them to change it before you pay. Anyway, good luck getting everything sorted. 🙂

      2. Thanks to the comments here, I ticked the Class 2 box 🙂
        I also asked them to tell me about paying past years.
        Fingers crossed on both…

  12. It looks like this Class 2 option could really be on the way out, in a current government consultation to scrap class 2 and replace with class 4:
    https://www.gov.uk/government/consultations/consultation-on-abolishing-class-2-national-insurance-and-introducing-a-contributory-benefit-test-to-class-4-national-insurance-for-the-self-employed/the-abolition-of-class-2-national-insurance-introducing-a-benefit-test-into-class-4-national-insurance-for-the-self-employed
    Main quote:
    “Those who are not self-employed in the UK but can pay Class 2 voluntarily
    They are:
    self-employed working abroad
    individuals employed abroad
    mariners on foreign vessels
    Class 4 liability follows income tax liability – when a self-employed person is working abroad there is no tax liability and therefore no Class 4 liability.
    This means these individuals could not accrue qualifying years for benefit entitlement via a profits test in Class 4. Therefore this group would need to pay Class 3 voluntary NICs instead to protect their State Pension record following the abolition of Class 2 NICs. This would align the voluntary NICs position of NICs payers overseas with those in the UK.”

  13. Wonder if anyone knows if it’s possible to receive both Japanese and UK state pension at the same time if both paid into for the required period?
    Thanks

    1. Don’t see why not! They are both payable worldwide, although the UK one is not linked to inflation (triple lock) unless you are in specific countries -Japan is not one of them.

      1. Thanks for the swift reply.
        Would I be correct in assuming a return to the UK, from Japan, for residence at any stage while being a claimant would boost the level back up to the normal index linked amount? It may take me a while to get there on my walking frame but better to know before I set off!

  15. Just found this blog! Age 48, in Japan and paying voluntary UK NI contributions for over 20 years. The Japanese pension system is bad, even the company pensions are nothing like they were in the bubble economy. My ( Japanese ) wife says that we should simply save for our retirement and not rely on any Japanese pensions……a tricky one.

    1. Hi David
      Welcome! I completely agree with your wife: we’re not planning on getting anything from our Japanese pensions, they will just be a pleasant bonus.
      I really recommend iDeCo and NISA accounts for investing. Check out the info pages or come to the forum for more info 🙂

  16. Hi,
    Thank you for the post. I am very interested in contributing to my UK pension. I am currently 32 years old and living in Japan (Since August 2017) I plan on staying here long term so would be great to get a Japanese Pension (after 10 years) + my UK pension.
    Luckily, I remembered my log in details for GOV.UK and was able to check my contributions. Out of all my years eligible from contributions (since 16 years old) I have luckily got 7 full years already 🙂 I also have to option to back pay a few later years. However, I may not choose to do that as the expected amount is quite high.
    Non the less. I could not find a form or place online to apply to start contributing towards my UK pension whilst overseas on the GOV.UK website. They gave a number to call but obviously I am not going to blow £1.80 a minute on a long call from Japan to the UK.
    So my question is…how does one apply for this?
    Thanks
    Chris

    1. Hi Chris
      If you click on the links at the top of the post, they take you to the leaflets that explain the system. At the back of one of those is the application form. You have to… mail it in. By post. And then they will take nine weeks to write back and tell you that you filled the form in wrong 😉
      You can call them using Skype. I think it’s something like 2 yen a minute to call a UK landline.
      By the way, you may be able to pay Class 2 contributions, in which case I recommend you pay as many as they will let you, as soon as possible. It’s an unbelievable deal that is going away soon.

      1. Many thanks for the reply. Sorry about the late reply my side as I only just noticed it.
        I shall look into the forms thanks a lot 🙂
        As for the back payments for years eligible they are like £700+ So I need to think about if it is worth contributing those years as will luckily come to more than a normal overseas amount for a year. Luckily given my age, I still have the ability to pay the required 35 years to get max pension by paying the slightly less overseas amount, thus making it possibly more cost effective to just exclude those years with high back pay.
        On a side note. Do you know how Japanese pension works? I have been on Shakai Hoken since day one (August 2017). Is the pension paid out like UK?
        (i.e not based on actual amount contributed but number of years contributed and contribution amount is based on salary)
        or
        Is the pension paid out based on amount actually contributed? for example I currently pay around 30,000 yen a month pension (employer matches that) would someone only paying say 20,000 yen a month get the same amount paid out to me but just pay less in as they earn less or would I benefit from a higher pension as paying more in?
        Thanks again.

      2. For kokumin nenkin it is a set amount, based on the number of months paid in.
        For kosei nenkin it depends on the number of months and the amount paid, so the more you pay the more you should receive. Average amounts seem to be 180,000 yen a month at the moment, so I would count on receiving abour 2/3 of that or so (rough guess) if you pay in the full number of months.
        https://seniorguide.jp/article/1061180.html

  17. Great! Thank you very much for confirming that.
    Obviously, I have many many years to change ideas/paths etc. However, I am glad that kosei nenkin is based on amount contributed (unlike the UK state pension and kokumin nenkin). Considering it would be very unfair for say someone like myself on like 23 of Shakai Hoken deduction thus paying 30,000 yen a month into pension to only receive the same amount as someone on say Line 19 thus only paying 23,000 yen per month.
    I have downloaded the form for UK contributions and will start completing it now. That way maybe in the future I can hopefully obtain the 35 years UK state pension as well (just another 28 to go…..) as a relatively good Japanese pension based on kosei nenkin contributions…. as well as personal savings.
    I do have an additional question however. Do UK and Japan have an agreement like Japan and USA etc? If so what are the benefits of this agreement? From my understanding the agreement combines the pensions into 1. But given the fact that I should eventually be able to get the 35 years contributed for the UK state pension by contributing abroad, surly it would be better to get both of them (UK and Japanese) separate?
    Many thanks again for all your help and advice.

    1. It’s not perfectly fair, unfortunately. For example, my payments (mine and my employer’s) into kosei nenkin are roughly five times kokumin nenkin, but the eventual payout will probably be around three times higher. Public pensions are generally redistributive though.
      Unlike the US-Japan tax treaty, the UK-Japan one only says that no-one will be forced to pay into both public pensions -they cannot be combined and payments into one cannot be carried over to the other. Effectively this means your nenkin and UK state pension will be completely separate, and under the current system you can receive both anywhere in the world.