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U-turn on NI contributions - 17/01/07
Thousands, maybe tens of thousands, of people will be refunded National Insurance contributions they need not have paid after the Government announced a change of policy, writes Paul Lewis
The problem was caused by the left hand (HM Revenue & Customs) not knowing what the right hand (Department for Work and Pensions) was doing. HMRC is responsible for collecting National Insurance contributions. But the DWP decides how many National Insurance contributions you need to get a full state pension.
In May the DWP decided that it would cut the number of years of contributions needed – from 39 to 30 for anyone reaching pension age from April 2010. But six months later HMRC wrote to 4.7 million people who had a gap in their National Insurance record to suggest they pay ‘voluntary contributions’ to fill it.
Otherwise it warned their state pension may be reduced when they retired. Each missing year costs more than £350 to fill. But HMRC did not take account of the DWP proposals to change the rules. So some people were being encouraged to pay extra who already had enough contributions to get a full pension. Towards the end of its complex letter there was a hint of the change. But nowhere did it say ‘do not pay these contributions until what changes are passed by Parliament’.
We mentioned this problem in Saga Magazine last August (see below*) and we, at least, did advise people not to pay any extra contributions until the new rules became clear. But when Saga asked HMRC if people who had paid National Insurance contributions that later turned out to be a waste of money would get a refund the answer was ‘no’. The Government confirmed in December there would be no refunds.
Then on Tuesday that policy was changed. The Secretary of State for Work and Pensions John Hutton presented to Parliament his plans to reform the state pension and he told MPs: "Some people who have paid voluntary National Insurance contributions since the publication of the White Paper last May might have chosen not to do so if they had been aware of the proposed changes on eligibility entitlements. That applies most obviously to someone due to reach state pension age after April 2010 who already has 30 qualifying years. I can announce that the Government will make arrangements whereby individuals in that position will be eligible for a national insurance refund."
Refunds will apply to people who paid extra contributions from 25 May 2006, the date the Government set out its plans to reduce the contributions needed. People who already had 30 years’ contributions but still bought more will get their money back.
My advice remains the same. If you have a gap in your record from 1997/98 or later you can fill it until at least 5 April 2009 and probably a lot later. There is absolutely no point in paying voluntary contributions until the Government’s pension reforms have gone through Parliament. So pay nothing now and review your position next year. After all there may be more U-turns on the way.
* In the August edition of Saga Magazine, Paul Lewis discussed National Insurance contributions and told readers: "The change also means there is now great uncertainty about the value of paying extra contributions to fill a gap in your record.
"Many people who have done so in the past may have wasted their money if they will reach pension age on 6 April 2010 or later as the new system may give them a full pension anyway. It is unlikely they will get any money back.
"It is probably safest not to pay extra National Insurance contributions until the details of the changes have gone through Parliament sometime next year."
This article was created: 17 January 2007.
This article was last edited: 15 February 2007.
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