Class 3 voluntary NI contributions - worth it?
May 31st 2023, 2:16 pm
#1
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Joined: Jun 2022
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Class 3 voluntary NI contributions - worth it?
I left the UK immediately after uni and have only the three "juvenile" starting years credited to my NI record. These are not considered working years and therefore I don't qualify to make Class 2 contributions. Are Class 3 contributions worth it? I doubt I will ever work in the UK again but I might retire there. I have about 20 years of US social security qualifying years.
May 31st 2023, 5:21 pm
#2
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Joined: Dec 2008
Posts: 525
Re: Class 3 voluntary NI contributions - worth it?
Probably. Class 3 is a lot more expensive than Class 2, but is still a good return. It's dependent on your situation of course - whether you have spare cash to invest (which is what paying voluntary NI is), are in decent health, and so on.
The UK state pension is payable regardless of which country you retire in, but it would be frozen (not qualify for an annual increase) at the starting amount if you retire in a country that has a frozen pension. The US isn't a "frozen" country.
You need 10 years' NI contributions to get a pension, so as you have 3 years already (you've checked this against the official records?), by paying 7 years' voluntary NI years you get 10 years' worth of pension, i.e. 10/35 x full pension amount. You may want to contribute more years for a larger pension, and definitely don't want to contribute less than 7 years (backlog + future years) as it will be wasted.
The UK state pension is payable regardless of which country you retire in, but it would be frozen (not qualify for an annual increase) at the starting amount if you retire in a country that has a frozen pension. The US isn't a "frozen" country.
You need 10 years' NI contributions to get a pension, so as you have 3 years already (you've checked this against the official records?), by paying 7 years' voluntary NI years you get 10 years' worth of pension, i.e. 10/35 x full pension amount. You may want to contribute more years for a larger pension, and definitely don't want to contribute less than 7 years (backlog + future years) as it will be wasted.
May 31st 2023, 9:50 pm
#3
Joined: Dec 2001
Location: Dixie, ex UK
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Re: Class 3 voluntary NI contributions - worth it?
I agree with Tdrinker, regarding Class 3 contributions. While much more than Class 2, Class 3 contributions are still a very good investment.
For every year of Class 3 contributions, which currently costs £907.40, after retirement you will receive, based on today's full state pension, an additional £5.82 per week of pension. So it will take 155.8 weeks (almost exactly 3 years) of retirement to collect increased pension payments equivalent to the amount you pay in Class 3 contributions. This calculation is true whether you pay one year of additional contributions at the Class 3 rate, or thirty two years. This is like buying an annuity that pays 33%, .... though to be objective you would need to discount your investment by the number of years until you retire* .... so the closer you are to retirement, the better a Class 3 investment looks.
* While there are many possible illustrative calculations that could be performed to estimate the value of future investment returns, if we assume that the UK state pension will increase at 3% per annum, in ten years the £5.82 per week (302.64/yr) will have increased to £7.82 per week (406.72/yr). Now if we assume you would have invested the money used to pay for Class 3 contributions to earn a return of 8% per annum, the £907.40 invested today would be worth £1,959.01 in 10 years. So using those estimates, the increased pension of £406 will have cost you £1,959 (£907 at 8% compound growth), which is a life annuity of 20.76% .... and there is no way to get an annuity anywhere near that for a 67 year old.
FWIW using those estimates, your investment will be paid back in just under 4 years and 10 months of retirement.
I just checked, the best annuity rates today for a 67 year old man in NC are in the 7%-7½% range, so my projection of 20.76% ten years in the future completely blows todays annuity rates out of the water. So while Class 3 seems expensive, it is still an extraordinarily good deal that you are unlikely to get close to with any other investment. Even extending those calculations forward to the twenty year point, the return would still be equivalent to an annuity paying 12.9%.
With 20 years already in the US, it sounds like WEP won't impact you much, if at all (you need 30 years of SS contributions to escape WEP entirely), but if you are ensnared by WEP, it is worth noting that any years attributed to Class 2 or Class 3 contributions while living in the US, are not subject to WEP.
For every year of Class 3 contributions, which currently costs £907.40, after retirement you will receive, based on today's full state pension, an additional £5.82 per week of pension. So it will take 155.8 weeks (almost exactly 3 years) of retirement to collect increased pension payments equivalent to the amount you pay in Class 3 contributions. This calculation is true whether you pay one year of additional contributions at the Class 3 rate, or thirty two years. This is like buying an annuity that pays 33%, .... though to be objective you would need to discount your investment by the number of years until you retire* .... so the closer you are to retirement, the better a Class 3 investment looks.
* While there are many possible illustrative calculations that could be performed to estimate the value of future investment returns, if we assume that the UK state pension will increase at 3% per annum, in ten years the £5.82 per week (302.64/yr) will have increased to £7.82 per week (406.72/yr). Now if we assume you would have invested the money used to pay for Class 3 contributions to earn a return of 8% per annum, the £907.40 invested today would be worth £1,959.01 in 10 years. So using those estimates, the increased pension of £406 will have cost you £1,959 (£907 at 8% compound growth), which is a life annuity of 20.76% .... and there is no way to get an annuity anywhere near that for a 67 year old.
FWIW using those estimates, your investment will be paid back in just under 4 years and 10 months of retirement.
I just checked, the best annuity rates today for a 67 year old man in NC are in the 7%-7½% range, so my projection of 20.76% ten years in the future completely blows todays annuity rates out of the water. So while Class 3 seems expensive, it is still an extraordinarily good deal that you are unlikely to get close to with any other investment. Even extending those calculations forward to the twenty year point, the return would still be equivalent to an annuity paying 12.9%.
With 20 years already in the US, it sounds like WEP won't impact you much, if at all (you need 30 years of SS contributions to escape WEP entirely), but if you are ensnared by WEP, it is worth noting that any years attributed to Class 2 or Class 3 contributions while living in the US, are not subject to WEP.
Last edited by Pulaski; May 31st 2023 at 10:32 pm.
Jun 1st 2023, 7:24 am
#4
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Re: Class 3 voluntary NI contributions - worth it?
I agree with the above.
my wife and I added 15 years of Class 3 in the years before we started collecting but I wish we had started earlier because we ended up with 30 and 31 years, missing out on a full pension because they raised the full amount to 35 years too late for us to add the extra few years.
my wife and I added 15 years of Class 3 in the years before we started collecting but I wish we had started earlier because we ended up with 30 and 31 years, missing out on a full pension because they raised the full amount to 35 years too late for us to add the extra few years.
