Get a £35k pension boost for £420

By PHILIP SCOTT
Updated: 10:57 EST, 18 March 2009

Savers have less than a month to cash in on the opportunity to get a pension worth £35,240 for just £421.20.

Benefit: Buying extra pension years could be a major boost

That is the deal on the table for some people with an incomplete national insurance record.

The uplift represents a staggering return on investment of 8,370%.

Presently, those with an incomplete National Insurance record can purchase a missed year for £421 but from 6 April the cost will jump to £627.

The offer, of course will not benefit everyone, those in the process of retiring or already retired are most likely to miss out.

But find out what your state pension is likely to be and see if you are suffering a shortfall - a state pension forecast can be obtained at thepensionservice.gov.uk or by calling 0845 3000 168.

Women's pensions explained

National Insurance contributions are typically taken from gross salary.

As the rules stand today, men require 44 and women, 39 years to be eligible for the full basic state pension, but from April 2010, both men and women will have to have notched up just 30 years of contributions.

People buy back missed years in a bid to get more income from the basic state pension in retirement – the typical example of someone who would buy back their state pension is a woman with a broken career history because of having children.

In addition, someone who has lived overseas may look to buy back years in a bid to maximise their income at retirement.

- How to buy back pension years

Women with less than 10 qualifying years of national insurance are entitled to no basic state pension but as soon as they do reach the decade mark, they are entitled to 26% of the state pension allowance.

This year the full basic state pension is just £90.70 a week, therefore, 10 qualifying years would provide a pension of just £23.58 a week.

But if a woman has only nine qualifying years, the cost of buying these extra years, dubbed 'Class 3 NI contributions' to get an extra year and qualify for 26% of the full basic state pension is only £8.10 a week, or £421.20.

To buy an index-linked pension of £23.58 a week, or £1,226.16 a year, on the open market would cost a 60-year-old woman £35,240 according to life insurer Standard Life.

The greatest benefit available at the moment is for someone near the ten-year threshold, but those further below it will still get a good deal by buying themselves to that level.

Similarly, even if a woman already has 10 qualifying years, buying extra years could still be worthwhile, as the cost is outweighed by the benefit.

The open market cost of the extra state pension bought by paying £421.20 in Class 3 NI contributions varies between £2,711.06 and £4066.44, which represents a robust return on investment of somewhere between 640% and 960%.

John Lawson, at Standard Life, said: 'Women looking to take advantage of this deal should act fast. The Government has cottoned on to the fact that Class 3 contributions are a giveaway and plan to raise prices from 6 April this year.'

Where the offer won't work

This is not for everyone though, there are reasons why you wouldn't take advantage. For example, you are a number of years from retirement and will probably achieve a full entitlement by the time you reach state pension age and as you will only need 30 years of National Insurance contributions to qualify for a full Basic State Pension, you could be less likely to need extra years.

In addition, remember that it may not be worth your while buying extra years if you stand to get means tested pension credit when you retire, or if even after you bought the years you still will not have the minimum required to qualify for any state pension.

Of course you could put money away now and the interest earned on it may offset the increased cost of buying a year in the future.

Women should also bear in mind that up to a point they get credited with NI contributions in years when they are claiming child benefit and can build up an entitlement that way.

Remember, a state pension forecast can be obtained at thepensionservice.gov.uk or by calling 0845 3000 168.

People who are buying back tax year 2007/8 have until April 2010 to do so at the lower rate, similarly people buying back tax year 2008/09 have until April 2011.

Find out what you need to retire with our pension pot calculator: