Expats: Impact Of UK Health & Social Care Bill On State Pension and National Insurance Contributions
The UK State Pension, Taxpayer, and Investors have all been under attack this week. National Insurance Contributions (NICs) are raised. The government removed the earnings element from the triple lock system and introduced a new tax via the Health and Social Care Bill.
What Is The Triple Lock?
Introduced in 2010, the triple lock was an agreement the State Pension would increase by the higher of the rise in earnings, inflation or 2.5% each year. Whilst many conservative voters are also pensioners in the UK, the government would have been on the hook for an 8% increase if they had not suspended the triple lock.
The New Health And Social Care Levy
Politically this would have looked bad on the day the Prime Minister said, “From next April we will create a new, UK-wide, 1.25 percent Health and Social Care Levy on earned income, hypothecated in law to health and social care, with dividends rates increasing by the same amount.” A full copy of the speech can be found here.
What Does This Mean For Expats?
I often recommend UK expats to make voluntary national insurance contributions (NICs). Unlike, when working in the UK, these voluntary amounts are not a percentage of your income. They are a fixed amount each year. The UK basic state pension is based on the number of years NICs you make, not the amount you pay.
Voluntary NICs can be made whilst you are overseas to maintain your NIC record. There are two types of voluntary NICS, class 2 and class 3. The different classes have different benefits and your eligibility will depend on your employment status before you left the UK. The contribution rate this tax year for class 2 is £3.05 per week and for class 3 £15.40 per week, see here for more details.
You will need to have at least 10 years of contributions to qualify and you need 35 years of contributions to receive the maximum payment which is for the 2021/22 tax year is £9,339. The consumer rights magazine “Which?” has a good article on the state pension which can be found here.
Is It Still Worth Making Voluntary National Insurance Contributions?
NICs are about more than just your State Pension, but if we take this as the main reason most expats make voluntary contributions, let’s look at the figures. Let’s assume you make 35 years of voluntary Class 3 contributions that is a total of £28,028 (35 x 52 x 15.40) paid. Ignoring inflation as it affects contributions and benefits. You will receive an income of £9,339 per annum starting from age 66.
A person age 65 today has a life expectancy of 18.8 years if they are male and 21.1 years if they are female (source: OECD). Therefore, statistically, you are likely to receive a benefit of £175,570 (9,339 x 18.8) if you are a man and £197,050 (9339 x 21.1) if you are a woman.
Compared to the amount paid in, this represents a very good return. Therefore, whilst the loss of the earnings link to the triple lock is disappointing, voluntary NICs still represent the most cost-effective form of pension provision for expats.
If you have been overseas for a few years and have not made voluntary NICs, it is possible to view your contribution record online and backdate contributions.
Is The State Pension Enough?
For those intending to retire to the UK, knowing the average household income in the UK would help benchmark the State Pension. The Office of National Statistics (ONS) reported the average income in the UK is about £29,900 for the tax year ending 5th April 2020.
From this, it can be deduced those living on the basic state pension alone probably struggle to pay utility bills in winter and have a modest lifestyle. Therefore, whilst a full NIC record is important, it is only part of the solution.