A reader writes:
My sister reaches state pension age later this year, so she misses out on the new flat-rate pension that starts in 2016. Years ago, after ten years of working in the UK, she married and went to live in the US, but never worked there.
Now she’s come back and has no pension – or only a tiny one. I understand she may be able to ‘buy back’ contribution years to increase her state pension, but by how much, and would it be worth it? Are there other ways she could boost her pension, using a small lump-sum inheritance?
Annie Shaw replies:
Your sister has two options: to increase her state pension and to make private provision. As you recognise, her state pension will be calculated under the old rules, but that may be no bad thing.
To qualify for the enhanced, single-tier state pension for post-April 2016 retirees, she would need 35 years’ National Insurance contributions and, under current proposals, a minimum of ten years’ to get anything at all.
Unless she’s certain she has ten full years’ worth, she’s potentially better off under the old scheme, where she needs 30 years to qualify for the full pension and will get a proportional amount for the full years when she did contribute.
Your sister first needs to contact the Pension Service and find out exactly what her entitlement is (gov.uk/future-pension-centre, 0845 3000 168). She could have made voluntary contributions after she moved abroad, but it seems she did not.
However, because she has lived in the UK for a continuous period of three years in the past, she may be able to make up some of her missed National Insurance contributions for a maximum of six years.
She may also be able to make further contributions under a scheme that was announced in the Chancellor’s autumn statement. This will allow people with a state retirement age before 2016 to fill gaps whenever they occurred.
The fine details have not been published yet, but it looks as though there will be a window between October 2015 and April 2016 during which a special class of voluntary contributions can be made. The cost has not yet been finalised, but initial suggestions are that it will be extremely advantageous for anyone seeking to purchase a secure income compared with commercial annuity rates.
Your sister can invest her inheritance to create a pot of money to draw down on, to top up her formal pension income. She should consult an independent financial adviser, as there are many ways to do this.
Finally, she could simply depend on her husband’s retirement income, assuming they are still together, but should ensure her needs will be taken care of if he predeceases her. This could be by taking out life insurance or, if he is buying an annuity, making sure that it includes spouse benefit, so that a proportion of the income continues to be paid after his death.