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Spend & Save

Kate Hughes: A lovely loophole for women – but be quick

When every employee of every financial services company in the land is focused on picking apart a single document like the pre-Budget report, loopholes are bound to be unearthed. Usually they represent huge but strangely muted benefits for the Government, at our expense. But Alistair Darling's decision to tinker with National Insurance has inadvertently let an unmissable opportunity out of the bag for women struggling with pension savings. Be warned, though; this is not something to tuck away in the "things to do eventually" file. You'll need to be quick.

About five million women fail to qualify for the full state pension, largely because they took career breaks to bring up children. Few of them will have come home from the hospital realising that their new bundle may just have condemned them to a retirement of poverty.

But some bright spark at Standard Life worked out this week that by doing a little topping up, some people with an incomplete NI record could buy a pension worth £30,656 for just £421, the equivalent of a staggering 7,200 per cent return for your investment.

Women with less than 10 qualifying years of National Insurance are entitled to no basic state pension at all, but as soon as they reach the magic number of 10 qualifying years, they are entitled to a pension of 26 per cent of the full basic state pension. This year, the full BSP is £90.70 a week, meaning that you would need 10 qualifying years to get a pension of £23.58 a week. If a woman has only nine qualifying years, the cost of buying Class 3 National Insurance contributions to get an extra year (and qualify for 26 per cent of the full BSP) 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).

Sounds great. But there was always going to be a hitch, and based on the rest of the pre-Budget report, it was bound to be an expensive one. Buried deep in the mountain of paperwork, the National Pensioners Convention and others have discovered that the Government has plans to quietly increase the price of buying back a year's worth of National Insurance from £420 to £626 in 2009 – nearly a 50 per cent hike.

"The Government has conned millions of older women by telling them they can buy back their lost pension, but failing to tell them exactly how much it is going to cost," Dot Gibson of the NPC rightly fumes. "Before this increase, only one in 10 were expected to take up the offer, but now it looks like the whole thing is unravelling. Women have a right to feel cheated. Women's pensions are a national disgrace and no amount of tinkering will mask the fact that the basic state pension must be raised across the board for all pensioners to help them avoid poverty in retirement."

You can buy a maximum of six years' worth of NI contributions at any one time, and it could make a real difference later in life. This is the Government whose answer to the desperate problem of 2.1 million pensioners living in poverty is a £60 one-off gift, so the rest of us will need to save ourselves.