Nick Bruining Q+A: How long do I have left to top up National Insurance and get a supersized UK pension?

Question

I would like to find out whether I am entitled to a part-pension from the UK?

I am a 77-year-old woman who worked from 1973, which I can’t prove, but from then onwards between 1974 and 1981.

I have my records and my National Insurance number. It is my understanding that you can top up National Insurance contributions to make it 10 years.

I am not sure if this is correct information.

Answer

Like the Australian age pension, the UK National Insurance scheme has undergone many changes over the years.

It is accessible to anyone who worked for at least three years in the UK, irrespective of residency and citizenship. To receive a payment, you will need to have 10 years’ worth of contributions to the NI scheme.

Fortunately, if you have less than 10 years you can “back-pay” missed contributions, resulting in an exceptional return on the “investment” by receiving a generous UK pension, payable for life.

The 10-year concession you are referring to relates to a one-off ability to contribute up to 16 years of contributions to the scheme. That is made up of the normally permitted six years of payments, plus a special one-off 10-year concession which closes in early April next year.

The ability to make extra payments is generally reduced by each year you are past the pension eligibility age. Nonetheless, and because of this special concession, it is worth making an enquiry to UK authorities which you can do by contacting the International Pension Centre on +44 191 218 7777.

You will find that the records they hold on your employment and eligibility will be accurate and you can then decide whether it is worthwhile making the payments.

Alternatively, an excellent Australian resource is the not-for-profit British Pensioners in Australia organisation, which can be found at bpia.org.au.

Question

I currently have a considerable overdraft secured against my home and I am in receipt of a disability support pension.

Through the passing of a family member, I am about to become the recipient of an inheritance totalling several hundred thousand dollars.

If I used that to immediately pay off the overdraft, would this reduce the impact of the inheritance on my pension?

Answer

It is important to understand how Centrelink views debts secured against your family home or primary dwelling. This also applies to investors who may have assets purchased with a loan secured against a primary dwelling.

As the primary dwelling is almost always exempt from Centrelink’s means testing, debts secured against this asset are also ignored.

That means that were you to immediately repay the overdraft with the inheritance, you are effectively shifting your new asset — the inheritance — into an exempt asset: the primary dwelling.

You will still need to notify Centrelink of the payment within 14 days of receipt, but it will not affect your pension.

Depending on your overall financial position, you might decide to terminate the overdraft, but you should be careful.

Without knowing your overall situation, you may need to access funds in the future for some reason. Given your income includes the disability support pension, getting a new loan then may be difficult. If the cost of retaining the overdraft is minimal, it might be worthwhile keeping it in place.

While not specifically relevant in your case, others should note how Centrelink views loans secured against a primary dwelling. That exclusion of the debt secured against an exempt asset means that it cannot be used to offset the value of an assessable asset.

For example, if you have a $500,000 investment property purchased with a $400,000 loan secured against your home, the full $500,000 value of the property is assessed under means testing.

If however, the $400,000 loan was secured against the investment property alone, only $100,000 is assessable.

If possible, it may be worth changing the security of the loan.

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