I read with interest your article about how much you need to earn to get a qualifying year towards the state pension, and applaud your good advice – but is there another point to be borne in mind?
I attach a P60 that I generated from my firm’s payroll software in which five months have £2,000 pay and seven months have just £1.
So although the gross pay is £10,007 and NI contributions have been generated, only £2,560 shows at the ‘lower earnings limit’.
Work plan: How are qualifying years for the state pension calculated?
The weekly paid seem to be the most vulnerable on this issue, and I wonder if you might point that out in another article.
People need to either register as unemployed or pay Class 3 National Insurance contributions. Miss a week and the year is lost – or am I missing something?
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Steve Webb replies: The building blocks of entitlement to the state pension are ‘qualifying years’ of National Insurance contributions.
Where people have a regular income every week of the year, the way in which a qualifying year is built up is pretty simple.
But in the increasingly common situation where people have fluctuating incomes, or perhaps periods when they are not earning at all, things get rather more complicated.
Indeed, under the current rules there are some people who pay no NICs at all during a year but still build up a ‘qualifying year’, whilst there are others who do pay NICs who may nonetheless not build up a qualifying year!
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
I hope I can clarify how the system works.
A crucial number in the system is the ‘lower earnings limit’.
This is currently £6,136 per year, or £512 per month (if you are paid monthly) or £118 per week (if you are paid weekly).
This is the earnings level at which your earnings start to count towards building up a ‘qualifying year’ (of which more below).
A second important number is the ‘primary threshold’ which is currently £8,632 per year, with corresponding monthly and weekly rates.
In terms of how much NICs you pay and what you get for them, there are three broad groups:
– Those who earn above the primary threshold in any given week or month: they have to pay NICs and these earnings count towards making the year a ‘qualifying year’;
– Those who earn between the lower earnings limit and the primary threshold: this group is ‘credited’ with NI contributions towards their NI record but do not have to actually pay NICs;
– Those who earn under the lower earnings limit – this group pays no NICs and gets no NI credits.
For a year of your working life to be a ‘qualifying year’ towards your state pension, you have to have paid (or been credited) with NI contributions on earnings equal to 52 times the weekly lower earnings limit.
As noted above, periods when you are earning below the lower earnings limit do not count towards this target.
But the good news is that weeks (or months) when you are earning more than the lower earnings limit help to make up for weeks (or months) when you were not earning (or earning below the LEL).
To give a simple example, suppose that you have a year in which you do no paid work for 26 weeks and then you do 26 weeks at an earnings level of £236 – double the lower earnings limit.
For the year as a whole, you have qualifying earnings of 52 times the LEL and this is therefore a qualifying year.
In the example given in the question, we can ignore the periods when the individual earned a token amount, and focus on the five months where pay was £2,000.
In each of those months, the pay was above the monthly LEL and therefore the full amount counts towards the annual target.
As five lots of £2,000 totals £10,000 for the year, and this is in excess of 52 times the weekly LEL (£6,136) this would count as a qualifying year.
From a National Insurance point of view there is therefore no need to sign on as unemployed for the ‘missing’ months and no need to pay voluntary NICs.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
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