Backpaying UK pension (Class 3)

[prn]

So, following Ben's advice, I wrote to the UK pension service last October inquiring about the possibility of making voluntary Class 2 contributions. I finally received a letter back this MAY(!) telling me that... I'm not entitled to pay Class 2 contributions, and will have to pay Class 3 contributions if I want to get any pension at all.

I am entitled to back pay the years I've missed since I came to Japan in 2006, and I was quoted these amounts:

2006-07: £596.25
2007-08: £689.00
2008-09: £689.00
2009-10: £689.00
2010-11: £626.60
2011-12: £655.20
2012-13: £689.00
2013-14: £704.60
2014-15: £722.80
2015-16: £733.20
2016-17: £733.20
2017-18: £741.00

So I'm looking at about £8000 (¥1.1million) to get up to date with payments.

Then I have to keep paying for another 20 years to be entitled to the full amount of £159 (¥24,000) a week / £8325 (¥1.2million) a year from 2050 (if the pension age isn't increased before then, which it probably will be)

So, although this is incredibly expensive, I suppose it makes financial sense to bite the bullet and pay the premiums if I hope to live at least a few years past 67...?

[RetireJapan]

With the proviso that there is some chance of the system changing for the worse, the UK pension voluntary contributions are an amazing deal.

Even the more expensive Class 3s (which I am paying) mean that you pay about 3m yen into the system, and they you get 1m yen a year after you reach retirement age.

Even if you only live to your early 70s you'd be in the black, and the real value of the pension is as 'longevity insurance', for peace of mind in case you don't die early

I'm planning to write one more post about my experience with the UK pension (just waiting for the backpayment to go through). It's a doozy. They are so incompetent/overwhelmed with Brexit/understaffed it would be funny if it didn't impact me directly...

[JapaneseMike]

Wanted to share my results of backpaying NICs, after about 3.5 months waiting I got a letter from HMRC approving my request to pay class 2 NICs. I had 7 years to pay so was able to cover it for around a thousand gbp.

Thanks Ben for kicking / encouraging me to action and the other RJ contributers for advice and updates With the recent news (other thread) that class2 NICs will not be abolished I'll probably pay annually to keep pace until they raise them or I max out.

[RetireJapan]

Only 3.5 months???? You are getting the VIP treatment

[KyushuWoozy]

I've done a deep dive into this (finally) and summarise here. Apologies if it repeats stuff already mentioned on this and other threads. I just wanted to put it all together. I’ve gathered this data from Googling, very useful info on this forum (including this thread), and calling HMRC (got thru' relatively quickly). I’ve done this research for myself so applies if you (like me):

1. Are a Brit
2. Live in Japan now
3. Have lived abroad for donkeys’ years
4. Haven’t reached retirement age yet
5. Are working rather than living a life of monied leisure

It may, or may not, apply to others.

First I called Future Pensions Centre +44 (0)191 218 3600 but they told me to call HMRC on +441912037010. I just had to give basic details (name, DOB, NI number) to get informed how many years contributions I had already paid. I have paid 8 years. This is way more than I expected (seems those years lounging on the dole weren’t entirely wasted).

To receive the full single-tier pension an individual needs 35 qualifying years. Where a person does not have the requisite 35 qualifying years, they will receive a reduced state pension, as long as they have a minimum of 10 qualifying years. A person who has less than 10 qualifying years will not receive a single-tier state pension. So what we are discussing here is opportunity for people to pay voluntary contributions to boost their pension entitlement.

How to claim: Send form CF83 found at the end of leaflet N138 to pay contributions from now on AND a request (if you tick that box) for them to send info about paying voluntary National Insurance contributions to plug gaps in your contributions record.

CF83 / N138 here: https://assets.publishing.service.gov.u ... _12_17.pdf

Which class to pay?

- If you are living and working abroad pay Class 2 - but only if you worked in the UK immediately before leaving, and you’ve previously lived in the UK for 3 years in a row and paid 3 years of contributions.

- Living abroad but not working pay Class 3 - but only if at some point you’ve lived in the UK continuously for 3 years and paid 3 years of contributions.

Cost of voluntary contributions:

The cost depends on the year you want to pay for. The cost for the 2018-19 tax year is:

* £14.65 a week for Class 3 voluntary NICs
* £2.95 a week for Class 2 voluntary NICs

Class 3 contributions must normally be paid within six years of the end of the tax year to which they relate. The deadline is 5 April each year. You can pay gaps of more than 6 years if you’re a man born before 6 April 1950 or a woman born before 6 October 1952.

BUT, wait …

HMRC have extended the usual deadlines for making voluntary National Insurance contributions for the tax years from 2006-7 to 2015-16. You will have until 5 April 2023 to make the contributions.

The amount to be paid is as follows:

* If paid by 5 April 2019, the amount payable is the rate that applied in the 2012/13 tax year for the tax years 2006/07 to 2009/10 for Class 3 and 2006/07 to 2010/11 for Class 2.

* For the remaining years, up to and including 2015/16, higher rate provisions will not apply until 6 April 2019.

* If payment is made after 5 April 2019, the rates may have increased.

Voluntary contributions do not always increase your State Pension. Contact the Future Pension Centre to find out if you’ll benefit from voluntary contributions.

Check your NI statement here: https://www.gov.uk/check-national-insurance-record

How much is full state pension (2018/2019): £164.35 per week.

How to calculate how much you will get: Each qualifying year on your National Insurance record after 5 April 2016 will add about £4.70 a week to your new State Pension. The exact amount you get is calculated by dividing £164.35 by 35 and then multiplying by the number of qualifying years after 5 April 2016. Actually, it’s more complicated than this because of the introduction of the ’new’ state pension in 2016 so you can read about it here: https://www.gov.uk/new-state-pension/how-its-calculated. Honestly speaking, I couldn’t work it out after reading this. Hopefully you’re smarter than me. Is it roughly £4.70 x number of qualifying years I wonder?

Important info I received second-hand but from a couple of sources: better pay any gaps in contributions before April 2019 to avoid expected negative changing regulations.

Will all / some of the benefit pass to non-UK-resident Japanese spouse when we shuffle off our mortal coil? [edited August 2019] No, unfortunately ... Info thanks to Ilovejapan member

Big kick in the nuts: for people living in Japan the rate will be frozen from the date you start receiving it (ie: won’t increase with inflation). It will however increase with inflation if you return to The Motherland.

Disclaimer: of course we don’t know how much any pension will be eroded by inflation by the time we retire, or any future changes in the pension system, if the government will have gone bankrupt, or if there will have been a nuclear war etc etc. I’m just trying to stick to the facts and put the info as it is now (Sep 2018).

Conclusion: for me at least, the fact that the pension will be frozen is a deal-breaker. Damn. After all that bloody research ...

Please feel free to correct anything I got wrong and fill in anything I missed.

[RetireJapan]

Not sure if this helps, but the pension is only frozen from when you start claiming it (in my case in about thirty years' time). It should grow in the meantime along with UK inflation/cost of living increases.

If you can pay the cheaper class 2s it's a total no-brainer.

If like me you have to pay the more expensive class 3s I think it still makes sense in a lot of scenarios, even without the increases once you start taking the pension.

[JapaneseMike]

So great summary KW, thank-you.

i'd like to add a few tweaks based on my experience of the process

1. You don't need to be a brit (I'm not) but i worked enough to qualify for a pension and now am backpaying to increase it. Even if you no longer have authority to live or work in the UK, as a payer of NI you are entitled to the pension (terms and conditions apply, etc)

2. 35 years is the requirement for receiving the new state pension, however if you started paying NI earlier you're amount of years to qualify might be lower. This doesn't mean you'll get more pension though.

3. The no lock in for inflation doesn't seem that bad. How often has the pension been increased really? Between now and retirement age (66-69 depending on your age) the pension may increase and after you begin your claim it may go up again. You'll get the former and miss the latter. Given you'll be living outside the UK and already have currency risk fron STG, adding inflation risk from UK CPI doesn't alter your risk profile by much.

Thanks for the great research, i hope as many people as possible can put it to good use.

Cheers

[adamu]

Note to self: use a compound interest calculator to calculate the opportunity cost of paying Voluntary Contributions versus an investment that can compound until retirement.

Although, the asset class for the pension is unique. The right to a government-backed income source is a rare privilege. If you can pay Class 2 but don't it almost feels like refusing free money.

[KyushuWoozy]

A couple of people have made the excellent point that if we can get away with paying Class 2 instead of Class 3 it's probably a good deal even though the pension won't increase after we start claiming it.

At the moment I'm trying to do the first step which is to check my national insurance payment record online. Unfortunately you have to have an app and put in a code and I'm stuck at that stage going backwards and forwards with the technical dream trying to sort it out.

One final point to make, I've been pleasantly surprised by how little time I have to spend either on hold or having a weird conversation with a computer before I speak to an actual human. Seems despite all the cuts, there are still some people working there.

[RetireJapan]

I think even class 3s are a good deal (I will pay something like 15,000 pounds for an 8,000 pound a year pension for the rest of my life). Class 2s are, as adamu says, free money.