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Buying back years?


Jackie
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Hi

I know this is not strictly about France, only excuse is that we have been living here for the past five and a half years!

Just wondering if anyone out there can answer a question on buying back ‘qualifying years’ to get the full UK basic State Pension. Many of you in my age group must have been in this situation.

I requested, and have now received, a pension forecast which states that I am 2 ‘qualifying years’ short to receive the full pension.  I know that I can buy back these 2 years but do they have to be the 2 consecutive years following my early retirement?  I ask this because the information supplied quotes a different cost for each of the five years following my retirement and obviously I would like to opt for the 2 cheapest years which happen to be 2001-2002 and 2004-2005.  It is implied from the paperwork that this is OK, but it does not actually say so in so many words.

Many thanks in advance for any comments.

 

Jackie
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I don't know the ins and outs, but Julie (my wife) has been told that buying years is a much better bet than AVCs on an occupational pension. I think you need professional help - do you belong to a professional organisation/union? If so they are probably best placed to help you, failing that an accountant or possibly the Department of Work and Pensions.

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Hi Dick,

I used to work for the Contributions Agency before they merged with the Revenue (and then Customs) so know the answer to this one.

When buying back years you can purchase the last 6 years worth + anything in the currect tax year. This sounds like gobbldygook, so I'll explain by example:

EXAMPLE: It is now December 2006.  Mr X will be 65 at the end of the month. According to a pension forcast Mr X needs 8 years worth of N.I. to make up his retirement pension to 100%. Mr X can buy back:

(a) Say 36 contributions for period April 2006 - December 2006 (Current tax year - but there is normally no point in doing this, but they don't always tell you that!)

(b) One year's worth of contributions for 12 month period from April 2005 (One year)

(c) One years worth of contributions for 12 months period commencing April 2004, April 2003, April 2002, April 2001, April 2000 (5 years worth).

Mr X cannot buy contributions for the period before April 2000 as they are now "time barred" (too late to buy them) so Mr X can never make up his 8 years as the most he can back-buy is 6 years.

As to the price of each year - the rule when I was there was that you could only sell back past years at TODAY'S price (i.e. Cost per week of a voluntary stamp in 2006), I can only guess that they have changed the regulations on this so that you can now buy them back at the price charged then (although find it VERY unlikely that a government woold sell you something in 2006 at 2002 prices!!!).  Otherwise, the only reason I can think of for a variation in price is whether there were only 52 contribution weeks in the cheaper years and the more expensive years were those with 53 weeks....................

Anyway, basically the Contributions element of the Inland Revenue have a duty to credit an N.I. account in the most "beneficial way to the contributor"................so in your case choose the two cheapest years to buy-back. It does not make any difference whether those years are 2002 & 2005 or 2004 & 2005, the net result to your pension will be the same.

Feel free to ask any other questions via the boards or PM.

Ros

 

 

 

 

 

April 2005

 

 

 

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There is a time limit on how many years you can go back, the DWP will advise you as to which years you can purchase.

However the latest advice from the DWP states that the number of qualifying years may or may not change in 2007 and therefore you may or may not need to purchase extra years. 

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I understand that if you have taken early retirement and are paying voluntary national insurance contributions towards your state retirement pension to make up a shortfall in your contributions records, do be aware that if the proposals in the goverment's recent White Paper come into law, then you may be paying unnecessarily. The proposal is that, if you will reach state pensionable age on or after 6 April 2010, only 30 years of contributions will be required for both men and women to qualify for a full state pension which you may well of achieved already. The Inland Revenue should be issuing letters to make people aware of this and warning them that they should onsider whether to pay further.

aj

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There is a lot of good helpful info above. Another point to consider is that you are paying a lump sum now, you will know the size, to buy an income that is determined by politicians. At the moment Labour & Tory seem well disposed to the state pension however I can remember when the Government was not.

The state pension is not funded ie its a pay as you go system that does not have a big pot of money. If the working population in the UK is large enough to keep funding it then all will be fine if not there will be a reduction in the pension. The so called demographic time bomb.

Dick mentioned buying added years in an AVC being the right thing to do, 99% of the time it is. With this you buy a known amount of income for the contribution ie a multiple of 1/80  of final salary. With the state its only known this year and the future depends on inflation then increase in earnings as defined by Government. Follow Dick's suggestion and get good quality advice.  

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One thing that (apparently) you should consider is potential changes to the regulations that may make it unnecessary to purchase additional years. - that is according to HMRC anyway - see http://www.hmrc.gov.uk/nic/vc3-important.htm (sorry but, srprise, surprise this software has still not been updated so anybody interested will have to cut and paste the link).

I have a suspicion that the above page was published last spring. Unfortunately they do not seem to bother to show dates so I guess it is possible it could be very out of date or very recent. Thus, if it might affect you, maybe check with them (or somebody who knows) rather than relying on the published page.

Ian
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Hi Jackie,

I've double checked the IR website, here are the links you should read:

 

http://www.hmrc.gov.uk/nic/class3.htm

 

http://www.hmrc.gov.uk/nic/vc3-important.htm  = This last should have been updated on 30th October 2006 (but hasn't been), it is not yet law (and may never be!) and (more interestingly) contacts I still have in the department don't know anything about this (but then communications in the IR were always dire!!!)

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As a simpleton re tax etc,I will be entitled to state pension in 18months time and due to taking early retiement, I will only have 96% full pension.looking at the amount due to buy back years,which amounts to aprox £1570,which equates to £3.5p a week increase.I think this would be better placed into a savings account just on the off chance I dont make it,as otherwise the additional paid in lump sum would be lost to the likes of Tony Blair. "Heaven" forbid the very notion of the matter.I would have to live another 8 years aprox just to break even -with no guarrantees as to future legislation/     Maude
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  • 2 weeks later...
[quote user="united"]

 

Dick mentioned buying added years in an AVC being the right thing to do, 99% of the time it is.

[/quote]

Actually, Dick said exactly the opposite, that buying extra years on your state pension was a better bet than putting money into an AVC. He did say you needed proper advice.

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I'm really confused now. I thought, that Dick was saying, that Julie had been told, that it was better to buy Added Years in a Private Pension, rather than buying AVCs alongside the existing pension. Nothing to do with the State Pension.

Added Years can be an expensive option ,but the benefits used to outweigh the costs, especially  if you were getting 40% tax relief on the contributions, whilst buying more time in an index linked scheme.

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Maude

I think there may be something wrong with your calculations.

I assume that you are female, but you never know these days......

To get a full pension you will need 40 years contributions. If you have a 96% pension you must be missing a maximum of two years which would cost you £785, less if you can top up any part years. That you say would give you a pension increase of £3.50 a week which would pay back in 224 weeks. Due to the full year increments I think you might in fact be £4.20 a week better off, and would so pay back in 186 weeks. Even allowing for income tax increasing the payback, thats not a bad return for an indexed linked investment.

Your calculation assumes that you have to buy 4 years additional time. If that really is the case then you would be buying £8.40 additional pension.

 

 

 

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It always pays to do a check on their figures too!! I had a phone call from Newcastle informing me that as I'd paid 44years, I didn't need to pay any more. The suggestion followed to contact the Pensions Dept for a forecast. I then had a letter saying I'd only paid 39years? After about a year of correspondence I was sent a computer printout showing my payments from the age of 16. As there were some obvious errors, I queried some of the entries.I then recieved another printout with 6 different entries!!!! accompanied by a letter telling me to throw away the first print-out as it was incorrect. I still have both and the letter. As payments for 2 years were suddenly MISSING I contacted my bank,payments being made by D.Debit. The bank cannot supply any details back more than 7 years. Try proving any different. The last 2 letters to the Pensions Dept have been unanswered, even allowing for the usual 2 months it takes to get a reply.

Fortunately I look upon it that whatever I end up with,is a bonus and whatever they've short changed me out of the Exchequer's needs must be greater.I sometimes think they are trying to bump me off with stress before I'm due anything. Better not speak too soon, I don't qualify till next year.

Regards. 5 mins St.Malo

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[quote user="BJSLIV"]

I'm really confused now. I thought, that Dick was saying, that Julie had been told, that it was better to buy Added Years in a Private Pension, rather than buying AVCs alongside the existing pension. Nothing to do with the State Pension.

[/quote]

Sorry, I've muddied the water a bit; I misunderstood Dick as well.

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I finished full time work early and was informed that I had a shortfall of 2 years on my NI record.  I registered as self-employed as I had a small periodic job.  I didn't earn enough to pay self employed contributions and could have applied for an exemption certificate.  However, I opted to pay voluntary SE contributions (£2.10 per week) and was able to make up the shortfall to enable me to obtain 100% of my state pension.

This was a much cheaper option than buying back years.

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