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State Pensions and NIC Update
Episode 17723rd July 2023 • I Hate Numbers: Business Improvement and Performance • I Hate Numbers
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Retirement planning is crucial, whether it's years away or just around the corner. As we explore the UK state pension in this I Hate Numbers podcast, we aim to provide clarity on the two-state pension types and how to optimize your entitlement. Our team is dedicated to empowering you with financial knowledge, so let's delve into the details.

Two Types of State Pension

The UK state pension comprises the basic state pension and the new state pension. The pension you receive depends on your birth date. Men born before April 6, 1951, and women born before April 6, 1953, are eligible for the basic state pension, while those born after these dates qualify for the new state pension.

Qualifying Years and Entitlement

To maximize your state pension, you need 35 qualifying years of paying the right national insurance contributions. Having a minimum of 10 qualifying years ensures you receive a proportionate pension, while anything beyond 35 years won't increase your pension further.

National Insurance Contributions

For employees, Class 1 National Insurance contributions count toward your state pension. Even on a low wage, you may receive credits to bolster your pension. If you're self-employed, paying Class 2 National Insurance (about £164 per year) helps build your pension record.

Filling the Gaps

Discovering gaps in your contribution history can be concerning, but fear not! You can buy back years until 2006 to improve your pension. The government recently extended the deadline to April 5, 2025, considering financial constraints and communication challenges. So, act sooner than later and secure your future!

Supplementing Your Pension

While the state pension is valuable, we don't believe it should be your sole financial pillar in retirement. Consider other provisions such as workplace pensions or setting up a pension if you're a director. Remember, pensions are an excellent tax planning approach for a comfortable retirement.

Conclusion

Understanding your UK state pension is a critical step in securing the retirement you deserve. Assess your qualifying years, fill any gaps, and make provisions for a financially stress-free future. Plan wisely, act promptly, and let's make your financial dreams a reality!

Call to Action: Explore our website for valuable insights and resources on financial planning. Stay tuned for upcoming podcasts and take charge of your financial journey. Together, we can build a prosperous future. Plan it, do it profit. 



This podcast uses the following third-party services for analysis:

Chartable - https://chartable.com/privacy

Transcripts

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For some people retirement is several years, if not decades away. For others, it's much closer. Wherever you are in the United Kingdom, in your age profile, your retirement plans, the UK state pension should factor into your considerations. In this week's I Hate Numbers Podcast, I'm going to be outlining the two state pensions that exist and yes, there are two,

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I'm going to be looking at the role that national insurance plays in the amount of state pension you're entitled to, and I'm going to look at the main qualifying criteria and what we can do in order to maximise the amount of state pension you get.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza, the I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number lovie and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

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Hi folks. My name is Mahmood. I'm the founder director of I Hate Numbers and book of the same name. And for over 28 plus years I've been helping business owners like yourself increase their financial understanding, make more money in their business, save tax, reduce stress, generate time, and have the business life

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they aspire to. And who wouldn't want that for themselves? Let's crack on with a podcast. The first thing I should comment on is the idea of state pension. This is not the government's money. This is everybody's money. People contribute, put money into the pot. It's there. If you meet the criteria, you are entitled to it.

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Draw it down. So it's not a very benevolent and gracious state that's giving that to us. It's money that we've earned, money that we've contributed and money that we're entitled to once we meet those magic criteria. As I commented on at the beginning of the podcast, the qualifying age first of all is 67.

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So for those born after April, 1960, then your retirement age when you can draw down on your UK state pension is 67. There is talk that says in the next parliament, within two years, they're going to be considering that age again. And there's talk of putting up to age 68. A topic for another time, perhaps. The next thing, there are two types of state pension.

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That's what's called a basic state pension and the new state pension. A wonderful naming convention there if you ask me. Now, the entitlement of those two pensions, because there are different amounts up for grabs and also what's called a difference in qualifying years is for those men born before 6th of April, 1951

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and for women, born before the 6th of April, 1953. You will get the basic state pension for those born after those two dates, 6th of April, 51 for men, 6th of April, 1953 for women. Then you'll be entitled and get the new state pension. The differential between the two is the new state pension is approximately, and we like to talk approximations, about 206 pounds per week, and the basic state pension, slightly less than that at 156 pounds per week.

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So we're talking about approximately seven and a half to 10,000 pounds worth of annual income. As a spoiler alert, by the way, folks, it still counts as taxable income. The next thing to consider is if you are looking at basic state pension, you need a maximum of 30 qualifying years. And for the new state pension you need

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a 35 year qualifying period of having paid the right sort of national insurance. The majority of the rest of this podcast is going to be looking at the new state pension, but we can take lessons from that and apply that to the old state pension as well. So we need 35 qualifying years to get the maximum pension, and you need a minimum of 10 to get something.

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What will happen is if you've got a minimum of 10 and no more, you'll get a proportion of that maximum state pension. If you've got 35. You'll get the maximum even if you pay over 35 years. By the way, you don't get any more UK state pension. The next thing to consider is what does it depend on? So apart from qualifying years, it's about how many years you paid national insurance. If you're an employee,

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it's called Class One National Insurance Contributions. That's what counts. Even if you are on a low wage, by the way, you still may get credits for that national insurance, and that goes into the pot as well. The second thing to consider if you are self-employed, a sole trader, some people may call you, is you have to have paid your class two national insurance and the class two, by the way,

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Is that fiddly small amount of national insurance, which conversations have been ongoing for a number of years about to abolish it or not, but it's still there. At current rates for 23/24, it's about 164 pounds per annum. Now there is within class two, if you earn below about six and a half thousand pounds a year in terms of taxable profits, you don't have to pay it.

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But I would strongly recommend all of you to follow the practice that we do for all our clients is that even if your earnings are small, so you've got small level of profits under self-employment, volunteer to pay that national insurance contribution that goes towards the state pension file. And that's a way to build up your national insurance record.

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So it's a false economy not to pay that, because you'll lose out when you get to that retirement age. The next thing to consider is what happens if you're not quite there. Now, you won't actually know that until you actually do a state pension forecast. And in a state pension forecast, you create your personal tax account. If you've got one already,

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fantastic. And within there, there'll be a menu option for where you can do a state pension forecast. There'll be a link in the show notes folks, by the way, so if you're not quite sure what I'm referring to, as far personal tax account is concerned, and this is part of the drive for HMRC, to make everyone digital register, create one or put a link to the HMRC site, create your tax account, and first thing you should always do is to find out where you are.

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Now, depending on your age profile, will determine whether by continuing to work in your self-employed work or as an employee, you can meet an employee of your own company will tell you whether you're on track to get those qualifying years. Now, if you're much older, you're further along the age line, there is a change.

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Now, if you have a gap and you're getting towards the end of retirement, you can buy years. The amount it will cost you is £17.45 per week under current rates, and you can go back as far as 2006. Now, up until a few weeks ago, the deadline was the 31st of July, 2023 to have made that decision to have gone through the process to buy those years.

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Prior to that, it was the 5th of April 23, but since that, the government has actually changed the rules again, and it's saying you can make that decision to go back as far as 2006 to buy those arrears of contributions and you've got until, wait for it folks, the 5th of April, 2025. The reasons why they've extended that timeline to go to the 5th of April, 2025 is one,

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Because of financial constraints that many people are facing because of the cost of living, the cost of business crisis, pressure on cash flow, pressure on household and business finances means that the money may not be there to buy those qualifying years. Number two is to give people time to figure out what's going on with the national insurance to make those communications.

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And there is definitely pressure on HMRC resources here. So that is a compromise situation away that you can plug that gap. I would certainly recommend: Don't delay too long. Don't wait too long. Get it sorted. Now, if you do find that you've got arrears, a tactic that we've suggested and approach that we've adopted with some clients is depending where they are in their age profile, depending how many years to go, you can certainly buy them straightforward.

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Look at the cost of buying them without the risk of being too morbid. Look at the additional pension contribution you'll receive. Typically, as a rule of thumb, for each year that you buy, the actual payback is about a year and a half to two years. Again, your circumstances will determine the exact calculation, but remember, the extra years that you buy gives you an increase in state pension until the day that you're no longer here.

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Obviously, once you reach that retirement age. The other way to supplement the gap is if you are self-employed, is to continue paying your class two. Figure out how many years you've got left over, and then you'll be able to determine whether you just plug the gap by continuing to being self-employed and to paying the national insurance contributions accordingly.

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Note folks, by the way, by the time you get to state retirement age, you don't pay any more national insurance, so there is a restriction on that. Alternatively, you could, if you have a company, if you don't have a registered payroll scheme, is to set up a payroll scheme here, put yourself as an employee, pay the requisite amount of money.

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And again, just in terms of broad, average, we're talking about 9,100 pounds a year, and that will. Effectively credit your national insurance account, anything above 9,100, by the way, you pay employers national insurance. Employers NIC, by the way, does not count towards your pension contribution. So let's summarise where we are, folks.

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Certainly if you can, the state pension should not be where you can rely on that for your lifestyle, rely on that to give you the life that you want. You should be making other provisions. So whether you've got a workplace pension, if you've got a business, if you don't have a pension and directors can opt out, get one set up.

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Pensions are one route, by the way, and I'm not a financial advisor, but I will certainly recommend as a tax planning tactic and approach. Pensions are good things. Now we're talking about private pensions in another podcast. We're focusing on the state pension here and now. Remember the magic eight of 67, that's when you can draw it down.

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There is talk of moving that up to 68 and even though physically you may live beyond that age, personally speaking, and I'm going to stick my neck out on here, I think people should be able to draw on their state pension at a much earlier age. But anyway, that's the rules and we've gotta go buy them. Look at where you are in gaps.

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Do that state pension forecast and either consider buying in those arrears of years or work them through self-employment being an employee, and contribute that way. Folks, I hope that video has been of use and of value. Like anything in the future, try not to look too much at what's gone before. Make some consideration, make some plans for the future for your own personal lifestyle as well as your business as well.

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Plan it, do it. Profit. And until next week folks, I'll see you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.

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