One of the happy by-products of the digitisation of state pension records is that by visiting the government’s “check your state pension” website, clients can also see their full, year-by-year National Insurance contributions record.
But as an adviser, there is plenty you can do to help them avoid drawing the wrong conclusions from it.
One of the most common misconceptions is that, just because you have a gap in your NI record, you have to fill it.
Provided clients have not actually avoided paying NI that was due, then just because a given year does not have enough contributions to count towards their state pension does not mean they are obliged to pay extra.
A second misconception is that topping up an NI record will boost an eventual state pension. On the face of it, it would seem obvious that if someone built up extra years of contributions, they would get a bigger pension.
But the fact we are currently in a period of transition from the old state pension system to the new one means that this will not necessarily be the case.
To further complicate the situation, it may be the case that topping up some years (such as those post-April 2016) will boost a pension, while topping up others might not.
The reason for this is that the Department for Work and Pensions undertakes two calculations when working out state pensions.
The first uses the “old” rules of a modest basic state pension (payable for 30 years of contributions), plus any Serps pension.
The second uses the “new” rules of a full flat-rate pension (payable for 35 years of contributions), minus a large deduction for past contracting out. Whichever of these two is the higher as of April 2016 forms the basis for the state pension entitlement, and post-2016 years of contributions are then added to this base figure.
For those who were extensively contracted out, the base figure as of April 2016 will usually be derived from the old calculation of a basic pension for 30 years of contributions, plus any Serps.
This means that someone with, say, 32 years of contributions would not boost their state pension by filling an NIC gap for a year before 2016. They would, however, boost their pension by filling a gap for a year after 2016, provided their pension was below the full flat-rate amount.
The cost of buying back years is also a bit confusing, and clients need to be aware that some of the concessions around buying back old years will come to an end on 5 April this year.
Paying voluntary NICs can be a great value-for-money way of improving income in retirement, but advisers can help clients make sure they only fill NIC gaps when it makes sense to do so.
Steve Webb is director of policy at Royal London