This article outlines the advantages of contributing voluntary National Insurance payments as a UK expat, in order to benefit from the UK state pension during retirement.
Target Audience
UK-domiciled expats who have worked previously in the UK and have since left to work/live overseas. Specifically (because I will be focussing on the “new State Pension” in this article):
Men born on or after 6th April 1951
Women born on or after 6th April 1953
** domicile: the country that a person treats as their permanent home, or lives in and has a substantial connection with. For most purposes, you can consider domicile to be your country of birth e.g. most British expats living offshore will still be “UK-domiciled” in the eyes of the UK tax authorities, even if they haven’t lived in the UK for decades.
National Insurance: the “what” and “why”
National Insurance is the UK government’s method of funding the UK state pension. Most UK-based employees (if over 16 years of age, and earning more than £183 per week) will pay National Insurance automatically as part of the PAYE (Pay As You Earn) process (i.e. the money will disappear automatically, along with income tax, before they receive their net salary).
Paying National Insurance results in you accumulating the all-important “years” in your National Insurance record. Accumulating 35 years of NI contributions means that you will qualify for a full state pension (at the time of updating this article [May 2020], currently set at £175.20 per week). A minimum of 10 years is required to receive a pro-rata portion of that full state pension. For example:
10 years of NI contributions: 10/35 x £175 = £50 weekly
25 years of NI contributions: 25/35 x £175 = £125 weekly
The age at which you will start to receive the UK state pension has recently been reviewed by the UK Government, as a result of statistics demonstrating increasing life expectancy for pensioners now, compared with when the state pension was first introduced in 1948.
Following a government review in July 2017, the following changes are being implemented, subject to parliamentary approval:
You can check your State Pension age here.
It’s also worth noting that the UK state pension is only increased annually by the highest of price inflation, average earnings growth or 2.5% (known as the “triple lock”), if you retire in certain countries, listed here.
So, it will be frozen at the level you receive in your first year as a pensioner if, for example, you retire in Thailand.
Recommended actions for the UK Expat
1. Check your current National Insurance record here. You’ll need your National Insurance number for this and will need to register for access to the online Gov.uk gateway (which is also useful for making online UK income tax returns).
2. Decide whether or not to pay voluntary contributions to fill in missing years (note: you can generally only fill in missing years for the last 6 years; no further back than that, so it’s important to consider this during your first 6 years as an expat). Voluntary “class 3” contributions cost no more than £795 per missing year, and you can instruct these online and then have the satisfaction of seeing them reflected in your record a few days later. For example, I last made contributions from paid employment in the UK in 2007-2008 and have made voluntary contributions for subsequent years abroad, as shown below:
So, how to decide whether it is worthwhile to make voluntary contributions? Let’s work through a few examples of how to judge the breakeven point for the “class 3” contribution level of investment i.e. how long you need to draw down on your pension (by staying alive!) to make such qualifying contributions worthwhile.
If you have 0 years of NI contributions:
Cost to get to the qualifying minimum number of years (10) = £795 x 10 = £7950
Income for that investment, at retirement = 10/35 x £175 = £50 weekly
So, you will break even on the investment if you live and receive your pension for £7950 / £50 = 159 weeks (around 37 months) past pension commencement age.
If you have 5 years of NI contributions:
Cost to get to the qualifying minimum number of years (10) = £795 x 5 = £3975
Income for that investment, at retirement = 10/35 x £175 = £50 weekly
So, you will break even on the investment if you live and receive your pension for £3975 / £50 = 79.5 weeks (around 18 months) past pension commencement age.
If you already have the minimum threshold (10 years) of NI contributions:
Cost of each voluntary contribution year is £795.
Each year of voluntary contribution gets you an additional 1/35 x £175 = £5 weekly
Hence, you will break even on the investment if you live and receive your pension for £795 / £5 = 159 weeks (around 37 months) past pension commencement age.
So, as you can see, the worst case breakeven point is 159 weeks for you to receive back in pension income what you have made in voluntary contributions i.e. if your pension commencement age is 67, you need to not die before the age of 70. For those under the minimum 10 year threshold, the breakeven point is even earlier (and the more years you have at this point, before considering voluntary payments, the earlier the breakeven is e.g. if you had 9 years, and made only one £795 contribution to get you to the 10 year threshold, the breakeven point is £795 / £50 = 15.9 weeks!).
It is worth noting that the GOV.UK website only shows the cost for you to repay “class 3” level contributions. Voluntary “class 2” contributions are possible, if you qualify, at an even lower cost (around £158 per year). You should be able to qualify for “class 2” if you are living and working abroad and have previously lived in the UK for 3 years in a row as described here. Note that the government planned to abolish “class 2” contributions on 6th April 2019 but had a change of heart in the Autumn 2018 budget due to the “potential impacts on some of the lowest earning in society”, so “class 2” contributions are still possible. In order to establish your eligibility for “class 2” contributions, you’ll need to complete form CF83 (included at the back of booklet NI38) and return it to HMRC by post.
Conclusion
Regardless of your privately-made pension provisions, if you are a UK expat, you should carefully consider making voluntary NI contributions to help bolster your retirement income with the UK state pension.
Be sure to do so early on in your expat career so as to not find yourself near retirement age and only able to voluntarily pay the most recent 6 missing years. As in so many aspects of personal finance, procrastination is the enemy!