Continuing contributions for a better retirement

National Insurance (NI) is widely regarded as one of the most cost effective retirement plans available, however the price of paying for Britain’s welfare state is high – and getting higher every year. For many it is seen as a chunk out of our salary and another form of taxation.

It is for these reasons that so many expatriates view NI as an unnecessary hole in their pocket and decide to cease paying when moving abroad, however in a lot of cases this can work as a serious disadvantage.

In recent times successive governments have regularly reviewed the level of state benefits with the basic state retirement pension now linked to increases in the retail price index. This has raised the level of the full basic pensions for the past few years. A married couple for example would receive on average GBP1K more in 2006 than they would have in 2001.

As you know NI contributions are not just restricted to retirement pensions. They also provide welfare funds for jobseekers, maternity benefits and incapacity payments. However as Brits move abroad the other contributions become less important and the state pension is usually considered to be the most vital benefit.

These state pensions are paid from your NI contributions, which many people stop when leaving the UK. However this can result in a significantly reduced pension or in some cases no pension at all upon retirement.

To compare, if you were to purchase an annuity providing an equivalent pension to NI you would require a significant lump sum, however this becomes completely unnecessary as long as the small, regular NI contributions are maintained while you are abroad. Contrary to be belief of many, NI contributions generally provide a good return compared to what you pay and can prove to be an extremely beneficial investment for your later years.

The method of NI contributions can differ between countries, the individuals occupation and the amount of time spent overseas.

Overseas secondments

When an individual is transferred abroad to a foreign based British company, the employer and employee must continue to pay full Class 1 NI contributions for the first year of overseas employment if your employer has a place of business in the UK, you are ‘ordinarily resident’ in the UK or if you were resident in the UK immediately prior to starting offshore employment.

To distinguish, the term ‘ordinarily resident’ for this explanation does have a different meaning to that for Income Tax purposes. In most cases if you maintain a property in the UK and continue regular visits you will be regarded as ‘ordinarily resident’ for NI purposes. If you are self employed or if your company does not have a place of business in the UK there is no statutory obligation to maintain these payments.

Reciprocal agreements abroad

The European Economic Area (and a few other countries around the world) have a reciprocal agreement in place with the UK where the ‘host’ country can contribute to a scheme until the individual returns to the UK.

These schemes can be quite complex in nature and can vary drastically from one country to the next. It is therefore strongly recommended that you speak with a financial advisor who is competent in the tax laws of your new country as well as the UK. It is also suggested that you speak with the Inland Revenue for clarification.

Difficulties usually arise where expatriates who have been offshore for some time have been working in countries where reciprocal agreements with the UK do not exist.

Calculating your NI pension

Your NI pension is payable from state pension age, which is currently 65 for men and 60 for women. However the state pension age for women is currently being revised over a ten year period starting from 2010. Women born prior to 6th April 1950 will not be affected, however those born afterward 6th April 1955 will not be able to receive their pension until the age of 65.

Your NI pension is calculated based on your full-rate NI contributions paid throughout your working life. Some women may pay a reduced NI contribution which does not count. Your NI starts from the age of 16 right the way up to retirement age. To qualify you normally must have contributed for 90% of this time, which works out as roughly 44 years for a man and currently 39 years for a woman.

If you have missed contributions for five years or less you can still qualify, however if you have not contributed to your NI for many years you are not able to make a lump sum payment to pay the deficit and buy your way back into the scheme. You are able to pay up to 6 years worth of NI arrears, however if a payment has been delayed for more than 2 years you will have to pay at the highest contribution rate in force during the period in question.

Therefore it would be worthwhile for expatriates who have stopped contributing to NI since leaving the UK to analyise whether it is worthwhile re-establishing their NI contributions.

Drawing your pension abroad

For those who qualify for a state pension and have retired outside of the UK are entitled to the rate payable at the time they qualify for their pension – normally the state pension age. However they will only be entitled to subsequent increases if they reside within the EEA of a county where the UK has a reciprocal agreement in place.

Eligibility for UK state pensions can be a complex and tricky area and will mainly depend on your contributions record. This is why it is strongly recommended to seek advice from a financial professional who is aware of both the UK state regulations and the regulations of your new country.

Voluntary contributions

Generally speaking there are three different classes of NI contributions.

CLASS ONE
Class 1 NI contributions are not paid voluntarily and are based on your earnings. They are normally paid by your employer and entitle you to maternity allowance, incapacity benefit or job seekers allowance should you return to the UK.

CLASS TWO
Subject to HMRC is may be possible to pay voluntary Class 2 contributions while living abroad. Currently these are more affordable than Class 3 contributions and allow you to claim a greater range of benefits. These are only available for those who have lived in the UK for a three year period and have contributed a set amount of NI payments.

CLASS THREE
Class 3 contributions can be paid if you have paid Class 1 NI contributions for the first 52 weeks of your employment abroad or you have lived in the UK for a continuous three year period and made the necessary contributions to NI in that time. These can be paid voluntary whether you are working abroad or not.

Voluntary contributions can be paid by direct debit from a UK building society or bank account. You can even arrange an annual payment if you find it easier to manage. You should complete a ‘CF83’ form if you are intending to pay voluntary contributions, however it is recommended that this should be done prior to going abroad.