Be quick to top up your pension

The cost of boosting your state retirement income is set to soar, so, to avoid a poverty-stricken old age, act now, says Kate Hughes

The basic state pension is woeful. At a maximum of £90.70 a week for a single person and £145.05 a week for a couple, it barely covers the essentials.

But a huge proportion of retirees don't even get that. Around 70 per cent of women and 15 per cent of men don't qualify for the full state pension because they haven't paid enough National Insurance. Some may not get anything at all. The good news is that you can pay to top up your contributions, but in less than a month the cost of doing so will soar by almost 50 per cent.

To qualify for the basic state pension you need to build up enough "qualifying years" of adequate National Insurance contributions – before you reach state-pension age.

The contributions are usually taken out of your gross salary. Currently men normally need 44, and women need 39 qualifying years to get the full basic state pension. From April 2010, that will drop to 30 years for everyone.

But many people, particularly women who may have taken a career break to have children, or those who have lived overseas, may not accrue enough contributions and will need to buy back as many years worth of contributions as they can to avoid hardship in retirement.

For the rest of this tax year, until 6 April, the cost of buying back each missing year, up to a maximum of six years at any one time, is £421.20 a year. But in less than a month that will rise to £626.60.

"We always said the price was going to go up because of the increasing costs to the Treasury as more people seek to buy back years, and because you will need fewer years to qualify [for the basic state pension]," says John McNally, a spokesman for the Department for Work and Pensions. "Yes, the costs are going up but it still represents a really good deal. It's a one-off cost which pays back for life."

It really could be worth buying it, according to calculations by insurer Standard Life. For example, women with less than 10 qualifying years of National Insurance are entitled to no basic state pension, but as soon as they reach those 10 qualifying years, they are entitled to a pension of 26 per cent of the full basic state pension. Right now, the state pension is £90.70, (which rises to £95.25 in April) meaning that 10 qualifying years would be needed to get a pension of £23.58 a week.

If a woman only has nine qualifying years, the cost of buying these "Class 3" contributions to get that extra year is only £421.20, or £8.10 a week. Yet, to buy an index-linked pension of £23.58 a week (or £1,226.26 a year) on the open market would cost £30,656.60 for a 65-year-old woman. If you already have 10 qualifying years, buying extra years could still be worthwhile. The open-market cost of the extra state pension bought by paying £421.20 in Class 3 contributions varies between £2,358.20 and £3,537.30, which still represents a healthy return on investment of between 560 per cent and 840 per cent.

But the cost of buying Class 3 contributions will rise to the equivalent of £12.05 a week, and Fiona Sharp of independent financial adviser Finance4Women says now is the time to act. "Anything that women can do to boost their pension provisions should be done now. It could make a significant difference to your quality of life, and right now only costs a few hundred pounds, which you would recover very quickly in retirement income."

But those who have already built up enough contributions for the full state pension and those who are entitled to pension credit because their income is low will not benefit from buying extra years. Others won't be able to buy enough qualifying years by retirement because you can only buy six extra years in any tax year.

Those who pay a reduced National Insurance, known as married women's stamp, may also not be eligible.

For a state pension forecast go to: www.direct.gov.uk/en/MoneyTaxAndBenefits/PensionsAndRetirement/StatePension.

For ways to pay extra Class 3 contributions call the National Insurance Enquiry Helpline on 0845 915 5996.