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State Pensions (03/2023)


The following rules apply assuming you will reach the state pension age after April 2016 (otherwise slightly different rules are required).  This is called the New State Pension and for 2023/24 will amounts to £10,608 per year.

The official state pension age is currently 66 for both men and women. However, this will increase to 67 between 2026 and 2028 and to 68 between 2037 and 2039.

To get a state pension, you need to accumulate sufficient qualifying years National Insurance (NI) contributions (minimum 10, maximum 35).  Note that if at any stage you have been a member of a contracted out pension scheme, you may need more than the maximum 35 qualifying years.

Once you reach the maximum qualifying years, your pension will not increase any further (other than if you defer taking it, which is a totally independent issue).

A strange quirk in the system

You get a qualifying year if you make NI contributions.  However, providing you’re paid income at the Lower Earnings Limit (LEL) of £6,396 (2023/24), then you qualify even though no NI is payable at this level! 

Many SME owners receive a low salary – before any NI is payable – combined with high dividend payments as this offers the best after tax returns taking into account both personal and corporate tax rates. Thus an added benefit of this approach is that those SME owners still qualify for the state pension without actually paying any NI.

Catching up lost years - usually makes sense

If you stopped working in any particular year you may have an incomplete year’s NI contribution or if you didn’t work at all then a complete missing year.  In such cases its possible to buy up the gap via class 3 NI contributions.

If you have no or insufficient contributions for 2022/23, then the cost to buy a qualifying year is either £842.20 (no contributions) or £15.85 per week (assuming you’ve made some contributions).  This will increase your pension by £275 pa, so as long as you live for more than 3 years as a pensioner, your extra pension will exceed the cost of purchasing this extra year.  With average UK life expectancies well beyond this, it makes sense to purchase these gap years to the maximum extent possible.

Ordinarily you can buy full or partial years upto 6 years ago.  However temporarily up until 31/7/2023, its possible to go back to 2006 to purchase any gaps.

To find out exactly how many years you have accumulated and still need to accumulate to achieve the maximum state pension use (this will require your HMRC online account and password)

Increase the state pension by deferring - not particularly attractive

If you defer taking your pension, you can increase its value. Your State Pension will increase every week you defer, as long as you defer for at least 9 weeks.  It increases by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks.

The extra amount is paid with your regular State Pension payment.

The economics of this option are nowhere near as attractive as buying gap years.  At current rates, you forgo a full years up-front pension @ £10,608 in order to secure an extra £615 in all future years ie you’d need to live at least 17 years as a pensioner to get your money back.

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State pensions

State Pensions (03/2023) Blog The following rules apply assuming you will reach the state pension age after April 2016 (otherwise slightly different rules are required). 

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