I’m still confused about a UK pensions article you wrote some time back. The person had 20 years of contributions and it takes 35 years to get a full pension, so a difference of 15 years.
Are you saying that if she now pays Class 3 contributions of £956.80 for the next 15 years (costing her not too far off £15k), she will have that £15k back after drawing the pension for two years and eight months?
R O’N
It all seems a bit fantastic but, in pure maths terms, that is exactly how it works. However, there are a couple of “real world” issues you need to take into account that will skew that simplicity.
We will come to that in a bit, but first let’s crunch the numbers.
Hundreds of thousands of Irish people – possibly millions – have spent time working in the UK at some point in their careers before returning home or moving on elsewhere. The fact that they could be entitled to a weekly UK state pension – currently paid at £241.30 (€288.50) a week – could make a big difference to some of them.
In 2026/27 – the current UK tax year – it will cost you £18.40 a week to buy back Class 3 national insurance contributions to boost your UK pension. That comes to £956.80 (€1,145.50) a year.
Regular readers will be aware that the cheaper Class 2 contributions many paid to buy back up to 18 years over cover recently are no longer available to people paying voluntary national insurance from abroad. So Class 3 is where we are at from now on.
The current full UK state pension is, as I said, £241.30 and each year you buy back will add £6.89 per week – one thirty-fifth of 241.30 – to the pension you eventually receive at today’s prices. That amounts to £358.28 extra in pension over the course of a year.
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To find out how long it will take you to “make back” what you have paid in, you simple divide the £956.80 cost by the extra pension you get on the back of it – £358.28. That gives you a figure of 2.67 per cent, or just a shade over two years and eight months.
For someone buying back 15 years, the same holds true: you are simply multiplying both the contributions and the benefit by a factor of 15 so you are not changing the math.
But now we come to where reality intrudes into the basic math.
The contributions you are paying come from already taxed income. As in Ireland national insurance is a form of tax, with a small “t”. But the money you receive in retirement will likely be liable for income tax and USC in Ireland, assuming you live here.
If you are paying income tax at 20 per cent, the extra pension amount into your hand each year for every additional year’s contribution you make drops to £286.62. On that basis it would take you 3.35 years, three years and about four months, to make back what you paid in.
If you pay tax at 40 per cent, the benefit in your pocket falls to £214.97 a year for each year’s additional contribution. On that basis, you would not be in “profit” on the arrangement until 4.45 years after you draw down the pension – close to 4½ years.
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USC will extend that again but, given the multiple rates, I’m not going into that in detail. Suffice to say that it will extend the “pay back” period slightly.
However, on average, an Irish man can expect to live for 15 years in retirement and a woman almost 19, so it still seems like a good idea.
There are a couple of other issues that clearly affect the precise payback time.
One is that you are dealing with currency risk. There is no way of putting a figure on this but, clearly, the euro/sterling exchange rates when you make the payment and when you eventually draw down the pension will be different. Whether that benefits you or penalises you, only time can tell.
Then you need to remember that both the pension payable and the cost of these Class 3 contributions tend to change each year. For instance, the full UK pension rate will rise to £250.70 a week.
You do also need to bear in mind that the British are once again fiddling with how they work out pension increases – largely because the current “triple lock” is proving expensive in the context of other demands on exchequer funds.
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As of now, the tiple locks guarantees that the state pension will rise by the highest of inflation, average earnings growth or 2.5 per cent. From April 2030, unless things change again between now and then, the link to earnings is gone – leaving pension increases to rise by 2.5 per cent or the rate of inflation, whichever is higher.
The expectation, certainly in Whitehall, is that this will reduce the scale of annual pension increases.
That all makes it difficult to be absolutely definitive on these things but, given that the UK state pension this woman receives in 15 years time (or whenever she subsequently retires) will be higher than it is today, it will in fact take less than the time given above to recover her outlay.
Of course, that does have to be offset against the “opportunity cost” – what return that money might have delivered if invested other than in buying back UK pension years – but we’re definitely not getting into that here.
There is one other issue that might skew the numbers. The 35-year timeline for people to secure a full UK state pension is based on someone who starts paying national insurance in 2016 when the new system came into force.
Of course, for the majority of Irish – and others – who are considering voluntary contributions, their UK national insurance record will have started earlier, many decades earlier in some cases. Under the old system, as I understand it, people could secure a full basic state pension on the back of 30 years contribution – but those who retired on this pension before 2016 receive a lower weekly payment.
So they really need to get a fix on what their UK pension position is.
According to the UK government website, they will work out your starting (2016) position under the new state pension. You will be entitled to the higher of the amount you would have got under the old system or the amount you would qualify for under the new system if it had been in place when you started making contributions.
This is important because you then know how many years of contributions you need to make on a voluntary basis to qualify for the maximum pension. It might not be as straightforward as “I worked there for 20 years, so I need another 15 years of voluntary contributions”… or it might.
Confusing? Yep, but that’s what happens when a country changes the way it calculates pension rights.
Anyway, to get a definitive answer, you can check your current pension situation with the UK authorities. There is a user-friendly online system but it does require a UK government ID which many who once worked in the UK will not have.
The alternatives are to contract them via a dedicated email form they provide, though they do warn that it is taking some time to reply to emails.
You can also try phoning – at +44 (0)191 2187777 – though regular readers will be aware of my view that confirmation in writing is always a good idea. Or you can write to them at: The Pension Service 11, Mail Handling Site A, Wolverhampton, WV98 1LW, England.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice.