There seems to be a lot of confusion regarding the payment of National Insurance contributions (NICs) and the benefits of the state pension for UK expats.
What I want to achieve with this article, therefore, is to give you an idea of the basic facts regarding the basic state pension and the necessary steps that you would need to take, should you want to make contributions on a voluntary basis and/or make up missed payments.
Armed with this information, you will then be in a position to make an educated decision on how to proceed.
To achieve a full basic state pension you need to have achieved a certain number of qualifying years. A qualifying year is a year where one of the following applies:
If you are a man born after 6 April 1945 or a woman born after 6 April 1950, then you need to achieve a total of 30 qualifying years in order to achieve the full basic state pension.
For the tax year 2011/2012, the full basic state pension will be £102.15 per week. This will increase annually by the highest of one of three index rates: prices, earnings or 2.5%.
If you have fewer than 30 qualifying years, your pension will be reduced on a pro rata basis. For example, if you only had 15 years, you would get £51.08 per week (15/30 = 50% of £102.15).
Your first step should be to contact the State Pension Forecasting Team in Newcastle and ask for a pension forecast.
This will tell you the number of qualifying years that you already have as well as the level of state pension that you can currently expect.
Their telephone number is (+44) 191 218 3600. If you contact them, they will then send you the completed relevant form for you to sign and return to them. (Remember, as with all communications with HMRC, to have your NI number handy when you call.)
Alternatively, if you want to speed the process up, you can download the relevant form here (PDF file, 295 KB) and send it directly to them. The address to send it to is:
State Pension Forecasting Team
The Pension Service
Allow them a few weeks to get back to you.
The next step, if you don’t already do so, is to start making regular voluntary contributions. There are two types of contribution that you can make, either Class 2 or Class 3.
To qualify for Class 2 NICs, you must have been “ordinarily” employed or self-employed immediately before you went abroad. (If you are in doubt as to whether you qualify, contact National Insurance Contributions – International Caseworker Team on (+44) 191 225 4811.)
If you don’t qualify for Class 2, then you need to make Class 3 NICs.
Class 2 contributions have the following benefits:
• they count towards your state pension when you retire;
• they entitle you to Employment and Support Allowance (previously known as Incapacity Benefit) and bereavement benefits when you return to the UK.
Class 3 contributions have fewer benefits. Namely, they don’t entitle you to the Employment and Support Allowance when you return to the UK.
In addition, Class 3 contributions are more expensive. For Class 2 contributions, the payment is equivalent to £2.50 per week (2011/2012). Class 3 payments are equivalent to £12.60 per week (2011/2012)
As you can see, wherever possible, it makes sense to pay Class 2 Contributions.
To commence contributions (Class 2 or 3) you need to complete the form CF83, which can be found on the last 2 pages of the NI38 document. You can find a copy here.
Payments can be made monthly by Direct Debit or with an annual payment.
If you haven’t been making any contributions for some time and still do not have 30 qualifying years, then you can make up missed years going back for the last 6 years. Your State Pension Forecast (mentioned above) will tell you how much you need to pay to make up each of these years.
Instructions on how to make payments for these missed years will be on the forecast letter.
Ross Naylor is a UK qualified financial adviser who has been advising expatriates on personal finance for the past 10 years. He writes a regular financial column in an English-language newspaper in Warsaw where he is based, as well as his own ezine and a blog: http://www.aes-rossnaylor.com/blog.