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Window to boost British state pension open to Australians
There are about 234,000 people living in Australia receiving a British state pension – and many of them could be entitled to more than they currently receive.
That’s the confident claim of Sydney-based financial adviser Jason O’Connell (pictured) who has specialised in dealing with the British state pension for more than 20 years.
This pension is a regular payment made by the UK Government once you reach state pension age, guaranteed for the rest of your life. To be eligible for this pension, a person needs a minimum of 10 years of UK National Insurance (NI) contributions, and 35 years to receive the maximum amount, which is currently £221.20 a week or £11,502.40 ($21,703) a year.
Ten years of NI contributions are needed to get a reduced-rate state pension when you retire (currently £63.20 a week or £3286.40 ($16,20630) a year).
Unlike the Australian age pension, the UK pension is a contributions-based system and not means-tested. Therefore, if you have lived in the UK and paid or received credits for NI contributions during that time, you may have a proportional entitlement to this pension even if you are not a UK national. The amount of pension you receive depends on the number of NI years with which you have been credited, based on the time you were living and working in the UK.
There is a unique window of opportunity for those meeting the criteria to pay voluntary contributions to fill any “gap years” – which does not mean what it does for your grandchildren – between April 2006 and April 2016. The deadline is April 5, 2025, when the cap on buying back years will revert to the last six UK tax years.
“People can ‘backfill’ their NI contributions, by ‘buying back’ years, which means making voluntary contributions for any years you were not working in the UK,” says O’Connell. “The ‘years’ we’re talking about are UK tax years, which end on April 5. Until April 2025, you can ‘backfill’ the decade of April 2006 to April 2016, making one-off contributions to enhance your entitlement.”
Two of the four different classes of voluntary NI contributions – Class 3 is the default class for all voluntary contributions and the only class available for UK residents making a voluntary contribution. For those with a minimum of three UK years of national insurance record, Class 2 contributions can be applied for with certain criteria such as having been making contributions in the UK immediately before leaving and previously lived in the UK for at least three years or being credited with national record for three years of contributions. Those not meeting the criteria for class 2 voluntary contributions, any voluntary contributions will be Class 3.
But what gives O’Connell so much business – and which has prompted him to set up a specialist sideline to his financial planning operation, called UKStatePension.com.au – is that “so many people have no idea that they’re either are or could be eligible for the UK state pension.”
“A lot of the work we do here is with Australians who’ve lived in the UK for three or four years, they’ve no idea about it, someone has told them, and they’ve got in touch with us. And the first thing we do is look to get them up to 10 years, so at least they’ll get something,” says O’Connell.
To be eligible to top-up, you need to have lived in the UK for at least three years and have at least a three-year NI record. But there are other ways you can get credits, apart from working and paying tax. “Quite a few different things can get you credits. For example, if you’re claiming the child benefit while living in the UK, or if you were on Jobseeker’s Allowance (JSA) – an unemployment benefit you can claim while looking for work – you automatically get a credit. And in some cases, you can claim them for eligible full-time education in the UK.”
Usually, O’Connell deals with a couple formed of “one Brit, one Australian.” The Brit is sure that they’ve got X number of years, so they make an application. When we’re making the application to assist them, we will then ask for a pension forecast for the spouse,” he says.
The state pension forecast (which is not a guarantee and does not account for inflation) shows you how much state pension you could get, and the date you can get it. You cannot get a forecast if you are already getting your state pension or if you have deferred claiming it.
“Until we get a forecast, we can’t determine whether they have three years or not, which is the minimum you need to be able to top-up to 10-plus years. Once you’ve got your three years, you’re then eligible to make voluntary contributions,” O’Connell says.
Ideally, the person would be classified as Class 2, in which ‘buying’ future entitlement is much cheaper, at (currently) £163.80 for a year’s entitlement, versus £824.20 for Class 3. “Most people we deal with in Australia are eligible for Class 2, but they just don’t know how to substantiate their claim. We help them to substantiate their claim, because we know these forms inside out, we’ve been dealing with them for 20 years. We also write a cover letter, and we also get evidence to back it up.”
Then, typically, comes the surprise. “If someone comes to us and they’ve got less than 10 years of contributions, they’re not going to get anything. The first thing is to get them over 10 years, they’re going to get a partial pension; for every year that they make a voluntary contribution, it will increase their annual lifetime income by £3,286 a year, based on the current rate.
So, if someone lives 20 years from the state pension age of 67-year-old – at least one person in a couple would usually live past 87 – for an outlay of between £158.60 and £166.95 for each year short of 10, they’re effectively buying £6,600 worth of lifetime income. Until April 2025 there are 18 years of voluntary contributions available to buy back (for those with gaps going back to 2006 who qualify for class two) for a one-time cost of £3,000 which, over 20 years, would boost your lifetime income by £118,310.40 ($223,133).
But the window to redress this issue closes in April 2025, with O’Connell warning that the paperwork can take several months.
