State pension contracted out - Adding years

[stephen500]

I said I was out of here - But my 2nd post in a day! - Back to gardening after this.
This has been spoken about before, but it is important, depending on how long you intend to carry on working.
For those of you in Section B or C, like me for years you were "contracted out".
That means you paid slightly lower national ins contributions, but were due to receive a lower state pension because some how your Royal Mail pension was increased? (Robert T could prob explain this better)
A lot of us, including me where ignorant of this, until the government "contracted" us in again a few years ago and we started paying full nat Ins contributions again.
Any how the up shot of this was that our state pension was reduced.
Mine went down to about £131 a week.
Every year since contracting out ended, I have been getting back £4.60 a year.
Up to 2019-20 I have got it back to £156.80 and for 2020-21 will add another £4.60.
This means without doing any thing, my state pension will be £161.40 (without inflation increases)
So I have 2 options.
For yourself, if you are still working, for each year that you work (paying an full years nat insurance contribution £796) you will gain another £4.60 a year. check your state pension forecast https://www.gov.uk/check-state-pension
So check your current state pension. Add £4.60 for this tax year and for each year you intend to carry on working, up to the amount of years you need to contribute for a full state pension.
It will tell you. For me It says, if I contribute for another 4 years (or 3 if you include 2020-21) I would have a full state pension.
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As for my options.
1) Get another job, where I earn enough to pay class 1 national insurance contributions and pay £796 national insurance per year for 3 years.
2) Do nothing and get a reduced state pension
3) Pay for years required. I need 3 years. I can pay £796 for each year. A total of £2388.
I would get (after tax at my basic rate, adjust for your rate. provided you will pay tax on your state pension) £574 extra per year on my state pension.
Meaning it would take me just over 4 years to get back the money I paid for my missing years and then I would be in profit till my demise.
However I don't think I, or yourself, can pay these missing years in advance.
I think, if I want to do this, I have to wait until I actually have a missing year.
The good news with this, I can wait till I am about to get my state pension at 66 years and 10 months and if I think I am about to croak, not bother paying it! I could also pay for each missing year as it passes.
From what I have read, we have 6 years to pay missing years.
I suppose it's a bit of a gamble if any of us leave planet earth before we have made back our extra contributions.
I will leave Robert T to flesh out what I have just said if he is happy to do so.

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[RobertT]

The whole point of contracting out of the state second pension was that the scheme you were contracting out into was supposed to provide at least as much pension as if you were contracted in.

Many people think they've been short changed, but they haven't. They just don't understand how it works!

Contracting out ended in 2016 and since then everyone in work and earning just £120 per week has been building up more state pension entitlement, and in many cases making up for those years spent contracted out.

The ongoing accrual rate of the state pension is 1/35th of the full rate for each qualifying year since 2016, which as the current full state pension is £175, works out as £5. That rate is uprated each year as the state pension increases and what you've already built up will increase by the same percentage too.

In my case, I'm in my early 50's and I only need to accrue another 2 qualifying years to get the full state pension aswell as my RM pension, so in practice contracting out will have no effect. Although the older you are, the more likely you'll be affected because you'll have less time from 2016 to make up the difference.

Which is where buying missed qualifying years can increase your entitlement.

Income tax is not directly payable on the state pension, but if your total income is above the personal tax allowance, income tax will be payable on your other income source/s instead.

I'm sure there are state pension guides available online, giving more info on how the scheme works and how to buy more years. Stephen is correct when he says, you can only buy years you've missed, not years you expect to miss.