Nick Bruining: Here’s what Aussies will now pay under new rules that close loophole for cheap UK State pension

Significant changes to the highly lucrative UK State pension announced two weeks ago will have a dramatic impact on its attractiveness to Aussies making use of the scheme.

But does the deal still stack up?

During the UK Labour Government’s 2026 Budget delivery in the House of Commons late last month, Chancellor of the Exchequer Rachel Reeves announced minimum National Insurance contributions would increase fivefold, and that the ability to catch up to meet minimum eligibility levels would be closed.

“The UK Government is restricting access to ensure those working abroad are making a fairer contribution towards their pension entitlement,” a spokesperson for His Majesty’s Revenue and Customs told Your Money.

But the changes have left many UK expats living in Australia — and Aussies who have worked in the UK in the past, making them eligible for the favourable pension access provision — fearful about their future entitlements.

“While we respect the British Government’s right to set the rules, any changes should only occur when sufficient notice is given,” said Patrick Edmonds, president of British Pensioners in Australia.

“This is not the case with the changes announced in the Budget, and many people are worried that their retirement plans have been severely disrupted.”

Local UK pension consultant Michael Goodall agreed the decision levelled the playing field, but he was hoping for a concession many had been seeking for years.

“Once your pension commences it is not indexed, and that rule only applies to ex-Commonwealth countries like us and South Africa,” Mr Goodall said.

“They could have softened the impact of the new rules by indexing payments.”

What are the current rules?

Under current rules, anyone who has worked in the UK for at least three years is able to make NI payments equivalent to an additional seven years to meet the minimum eligibility requirement of 10 years to receive a part UK State pension. To receive the full pension of £241.30 ($486.35) a week from April 2026, you would need to have paid in 35 years of contributions.

If you were working in the UK immediately before your departure, and then worked here in Australia, you can make the relatively low-cost top-up Class 2 contributions of £179.40 a year.

The maths is extraordinary.

A seven-year outlay for someone meeting the current three-year minimum is, at most, £1255.80. That payment results in 10/35 — or 28.6 per cent — of the full £241.30 pension. That’s £68.94 a week — or £3584.88 a year. The return on your initial “investment” is an incredible 285 per cent a year — effectively guaranteed by the UK Government.

The only real risk is that you die before you reach the eligibility age of 66, rising to 68 over the next few years. In that case, you get nothing.

What changes, and should you keep topping up?

Here’s the bad news.

From April next year, you will have to have met the 10-year requirement first by working in the UK before being able to make any additional payments. If you’re under 10 years, your choices are limited.

The Class 2 contributions will no longer be available and will be replaced with the much more expensive Class 3 contributions of £957 a year, applicable from April next year. Class 3 contributions currently apply if you didn’t tick the employment boxes.

But the deal still makes sense, even with the higher rate.

Under the new 10-year minimum rule, by definition you must already be eligible for at least 10/35 of the State pension anyway.

You can still “buy” additional years at £957 a year.

Each £957 buys you 1/35 of the full £241.30-a-week pension, which works out at £6.89 a week. Over a year, that’s £358.28. While a 37.4 per cent return on your money might not be as attractive as 285 per cent, it’s still more than you’ll get having the money parked in an NAB term deposit.

You’ll get all of your money back, providing you live for about 2½ years after you reach UK pension age.

Also remember the UK State pension is indexed up until you claim. The percentage you receive stays fixed. While the full pension will rise to £241.30 a week from April next year, it could easily be more than £300 a week in six or seven years time.

For people caught in the no-mans land of not quite 10 years, there’s good news from the HMRC office in London, which points out people can still back-pay Class 2 contributions for up to six years.

“A customer can still pay Class 2 voluntary contributions after April 6, 2026 for past tax years, to make up gaps up to and including the 2025-26 tax year,” the HMRC spokesperson said.

“The deadline to pay for the previous six years is April 5 each year. For example, you have until April 5, 2032 to make up gaps for the 2025-2026 tax year.”

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association