Question about NI voluntary contributions

Hi - we've been in the UK for 5 years (relocated by my employer). My husband hasn't worked at all since we left the US. We've only recently decided we are likely going to retire here, so I've been paying a lot more attention to things like pensions. As such, I only recently realized that we could have (I think?) been paying voluntary NI contributions for him all along. Given that he will be getting Social Security, is it worth making the voluntary contributions now (including backfill)? Or would the WEP penalty make it a wash? His SS benefit would be about $2000/month and he would get 15 years max of NI years if we backfilled from 2015/16 and continued paying until we wanted to start claiming benefits.

Thanks!

Hi - we've been in the UK for 5 years (relocated by my employer). My husband hasn't worked at all since we left the US. We've only recently decided we are likely going to retire here, so I've been paying a lot more attention to things like pensions. As such, I only recently realized that we could have (I think?) been paying voluntary NI contributions for him all along. Given that he will be getting Social Security, is it worth making the voluntary contributions now (including backfill)? Or would the WEP penalty make it a wash? His SS benefit would be about $2000/month and he would get 15 years max of NI years if we backfilled from 2015/16 and continued paying until we wanted to start claiming benefits.

Thanks!

Voluntary contributions don’t count towards WEP so no worries on that score. There is a SSA form you file where it asks for the years of voluntary contributions and discounts them. For example if your OAP is £4k/ year  and half of it is due to voluntary contributions then only £2k is used in the WEP calculation. 

Ooh interesting. Thanks!

he would get 15 years max of NI years if we backfilled from 2015/16 and continued paying until we wanted to start claiming benefits.

As Durhamlad says, if it's all voluntary contributions it won't be affected by WEP. So the comparison you'd want to make is between the pension this would entitle you to, and investing the money elsewhere.

Class 3 contributions are currently around £880/year, so 15 year of NICs would come to £13,200. This would give him 15/35ths of the state pension, or £4,002 per year.

That's a pretty good deal. As a guaranteed index-lined income and ease of use, it's probably hard to beat. But let's guestimate what compound returns in the stock market would do on that initial £13,200 in the estimated 10 years between now and when he would claim the state pension.

Presuming your husband is still subject to US taxes, most of the UK tax advantaged accounts will not be available to him, so we're looking (based on US historical data) at an average 4% after-inflation return, which comes out at £19,539. If he does have access to tax advantaged accounts, we can use a post-tax return of 7%, and the number increases to £25,966.

Presuming he plans to live for 30 years after retirement, he should be able to withdraw 4% a year with a 95% chance of not exhausting the capital (and a 50% chance of ending with more than he started with). Which would give him an income of £782 / year (£1,039 / year if he was able to use tax advantaged accounts).

It's not even close. In your place, I would absolutely make those NIC payments. The only scenario you loose out in is the morbid (sorry!) one where he dies before or shortly after making pension age.

I personally have a suspicion that the state pension could become somewhat means tested before folk like us get to retirement age. However, if you're rich enough for this to be a risk, you probably aren't dependent on the pension anyway and can afford to roll the dice. If you're poor, investing outside a pension also has disadvantages when applying for care home fees, court judgement relief, scammers, etc.

As Durhamlad says, if it's all voluntary contributions it won't be affected by WEP. So the comparison you'd want to make is between the pension this would entitle you to, and investing the money elsewhere.

Class 3 contributions are currently around £880/year, so 15 year of NICs would come to £13,200. This would give him 15/35ths of the state pension, or £4,002 per year.

That's a pretty good deal. As a guaranteed index-lined income and ease of use, it's probably hard to beat. But let's guestimate what compound returns in the stock market would do on that initial £13,200 in the estimated 10 years between now and when he would claim the state pension.

Presuming your husband is still subject to US taxes, most of the UK tax advantaged accounts will not be available to him, so we're looking (based on US historical data) at an average 4% after-inflation return, which comes out at £19,539. If he does have access to tax advantaged accounts, we can use a post-tax return of 7%, and the number increases to £25,966.

Presuming he plans to live for 30 years after retirement, he should be able to withdraw 4% a year with a 95% chance of not exhausting the capital (and a 50% chance of ending with more than he started with). Which would give him an income of £782 / year (£1,039 / year if he was able to use tax advantaged accounts).

It's not even close. In your place, I would absolutely make those NIC payments. The only scenario you loose out in is the morbid (sorry!) one where he dies before or shortly after making pension age.

I personally have a suspicion that the state pension could become somewhat means tested before folk like us get to retirement age. However, if you're rich enough for this to be a risk, you probably aren't dependent on the pension anyway and can afford to roll the dice. If you're poor, investing outside a pension also has disadvantages when applying for care home fees, court judgement relief, scammers, etc.

This is just phenomenally helpful. Thank you so much for taking the time to work through this.