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A case study on UK State Pension….. myself !!

I moved to Aberdeen in June 1992 and started work there in August. I finished up at the end of September 1996 and returned to Ireland so, a little over 4 years. Years passed and I eventually made an enquiry from HMRC regarding my eligibility for UK State Pension, if any, thinking I could not possibly get anything. HMRC confirmed I had 8 qualifying years!! Subsequently I found out that the 8 years included 3 ‘notional’ years (referred to as Juvenile Credit by HMRC).

 

Even with 8 years I still ostensibly did not qualify for any UK State Pension because of the “minimum 10 qualifying years” rule. However, years contributing national insurance in another EEA country (Ireland and the UK are both EEA countries) also count in the qualification criteria. That means I qualified for a UK State Pension of £32.61 per week at the UK state retirement age (which by the way is one year earlier for me than the Irish state retirement age).

 

At a subsequent stage I decided to make voluntary contributions for 7 further years costing £4,726.80 (€5,545). Sadly, the Irish Revenue do not allow a tax deduction for those contributions notwithstanding the UK state pension is taxable as are all other pensions. I later requested an updated UK pension statement and yes, it confirmed that my new UK state pension benefit was £61.15 per week. This corresponds to 15 qualifying years ((8+7)/30 * £122.30). I will recover the voluntary contributions in little over 3 years of retirement!! And, I will receive the Irish state pension as well.

 

The additional benefit I received because of the voluntary contributions, £28.54 per week (£61.15-£32.61) would cost probably cost £45,000+ (€50,000 approx) under the typical pension life annuities that come with occupational Defined Contribution schemes. With voluntary contributions to the UK State Pension, you are getting the same benefit for roughly 1/10th the cost of a life annuity. True, you have to pay it in advance but then HMRC give you a generous window of 6 years (up to 2024) to make the voluntary contributions so, its not really in advance, is it?. Also, the UK State pension will increase annually by a minimum of 2½% per annum under the ‘triple-lock’ provisions whereas practically no life annuities have inbuilt annual increases, it is the same amount you will receive until you die.

 

There really is huge value in optimising your UK state pension. It may be ‘small change’ but when you combine it with your Irish state pension and whatever occupational pensions you have, it may make retirement not so daunting.

 

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