What is happening?
Over the last few months, many people of working age have been getting letters from the Inland Revenue telling them that their National Insurance contributions in previous years are insufficient to qualify them for a full state pension. Pensioners will be getting similar letters from the Pensions Service from June onwards.
The letters will offer them the chance to pay voluntary contributions (known as 'Class 3' in the trade) to make up the deficiency and become entitled to a full state pension.
As payment is voluntary, people receiving these letters will have to make for themselves the very complex decision whether or not to pay.
What went wrong?
The fact that some of these deficiencies are several years old prompts the question: why are the letters not being sent out until now? What has gone wrong?
To receive certain social security benefits, in particular the state retirement pension, a person has to have paid a minimum amount of National Insurance contributions (NICs). It used to be normal practice for the Contributions Agency (the Government department which ran the National Insurance system) to send 'deficiency notices' each year, warning people if their record showed a shortfall in the contributions they had paid in that year.
Then in 1998 the Contributions Agency ceased that practice because of problems with the new computer system they had installed - known as NIRS2. When the Revenue took over the running of NICs in 1999, they decided not to resume issuing deficiency notices. Allegedly nobody else was told, not even a minister.
When the minister did find out, early last year, she ordered deficiency notices to be issued for the past six years, 1996-97 to 2001-02; for recipients who wished to pay the additional contributions to be given the option of spreading payment to 2008; and for them to pay at the lower rates of contribution in force in those years.
The Government's performance on this issue has been described by a committee of MPs as a 'disaster area', and by the Chairman of the Inland Revenue as indicating a 'training need' within his organisation.
In view of those findings, LITRG is concerned that an unreasonable burden is being placed on contributors, many of whom are on low incomes, to decide for themselves issues which need the combined expertise of a pensions specialist, a tax professional, a welfare rights adviser, and an actuary to be fully understood.
What issues do recipients need to consider? If you have received one of these letters, you will find that the Revenue set out the issues pretty clearly, even if they give little inkling of the real complexity behind them.
The first question the letter asks you to consider is whether the Revenue's record of your contributions is accurate. Some who have already received these letters have found that they are recorded as having a shortfall in a year throughout which they were actually working.
The second, much bigger, point at issue is that, assuming the record is correct, many may not get value for money by paying these contribution shortfalls. The value of the extra pension and benefits you would receive in the future may be less than the additional contributions required. If you fall into any of the following groups, it is at least probable that you will not benefit from paying the extra.
- Pensioners who are already receiving state pension credit.
- Working age people who expect to receive the guarantee element of state pension credit (formerly minimum income guarantee) when they retire.
- People in poor health whose life expectancy is impaired.
- People who expect to be able to rely on their spouse's contributions.
- Those who are entitled to National Insurance credits for the years in question (for example, claimants of certain benefits such as incapacity benefit, unemployment benefits, or carer's allowance).
- Those who have been caring for children or a sick or disabled person and qualify for Home Responsibilities Protection (HRP) during those years.
In deciding whether to pay or not, you also have to deal with a series of imponderables.
- If relying on state pension credit entitlement, will the benefit still exist in the same form when you reach retirement age?
- In any case, you must evaluate the effect on existing welfare benefits of taking an increased state retirement pension.
- If you are relying on a spouse's contributions, the status of your marriage may be relevant. Also, where you are relying on a former spouse's contributions, you must consider the possibility that you might remarry - in which case your former spouse's contributions may no longer be available to you.
In any event, many who receive these letters might not have enough resources to meet shortfalls. If you are in this position, you should also consider the merits of making contributions in relation to their other priorities - for example, the desirability of reducing or containing any costly debt burdens you may have.
Contact Name: Robin Williamson (Contact tel: 0844 579 6700, Fax: 0844 579 6701)