Luckyone

Copied from the link below.....

"The abolition of Class 2 NICs will mean that non-residents, who wish to preserve their UK national insurance entitlements, will now be required to pay class 3 NICs instead. This change will mean that the cost of contributing to the UK national insurance system will increase by over £570 per annum for these individuals"

https://www.accountancylive.com/budg...s-win-election

jb82

Oh I see it is a proposed change for a future government if they win the election. I missed that the first time.

Well if I was George Osborne I'd do the same.

We are all crying here as it was a sweet deal for expats. These pension reforms are really messing me up. First the loss of the spousal pension and now maybe this. There is no way I'm anywhere near better off. Then there is WEP circling like a vulture and a grey area about whether tax free lump sums are taxable in the US.

Steve_

I have to say I'm utterly unsurprised, I'm amazed they let us pay £145 a year and still qualify for a full State pension. Anyway didn't you all get the letter, I got one from HMRC saying they're just going to invoice me every year (in July) for the full payment, I assumed it was because a lot of people don't keep UK bank accounts. I know the only reason I've got a UK bank account is for the NI direct debit.

So basically you'll be able to do it with a credit card in the future.

It will suck if I have to do Class 3 though. Works out to £723 for 2015. Still a bargain, frankly.

jb82

You have to remember that if you live in the UK and were self employed they let you pay £145 a year and still qualify for a full State pension as well. So it isn't like we are getting special treatment. It really ought to be based on class 4 for self employed to be fair on the employed.

Its funny that in the US self employed are penalized in the US for social security (by having to pay both employee and employer parts) but in the UK considering both class 2 and 4 NI contributions they are really treated very generously. By far my biggest tax expense in the US is social security whereas in the UK it was much more skewed to the tax side.

nun

Hang on here, are we abolishing Class 2 NI or just paying it in a different way?....he following link says that Class 2 remain but they are paid in a different way and are voluntary if profits are below a threshold.

https://www.gov.uk/government/upload...class2-nic.pdf

jb82

Sorry I think I confused things.
Presently there is just a change in the way the ni contributions they are paid.
There was a further announcement (to win votes at the next election) that if the Tories are in power next government they will totally abolish class 2 (and reform class 4).

nun

Yes, that's the way I read it too. The thing is it would be hard for a Labour/SNP/LibDem coalition government to roll back Class 2 abolition. I'm just glad that I have 31 years paid up and should get at least one more at the Class 2 rate depending on how long it takes to implement.

Steve_

Well let's be actuaries for a moment.

30 x £723 = £21,690

And the current payout is around £7,500 a year. So basically, if you survive for three years after pension age you're ahead of the game. Except of course that money from 30 years ago is worth a hell of a lot more, but on the other hand they raise the payout with inflation.

And of course I assume everyone posting here already had x number of years of contributions as Class 1 and 2 anyway.

LondonSquirrel

It's 35 years now to get a full pension. They put it down to 30 years but it went up to 35 a while back. Don't know what it was yonks ago - 40 years?

Luckyone

it's been up and down a few times in the last few years....but I think it's 30 years at the moment. Who knows for how long though......

https://www.gov.uk/state-pension/eligibility

nun

You really have to compound the contributions at maybe 5% and have the contribution itself grow at maybe 2% for inflation. So after 30 years you'd have 63.5k. Assuming the payout also goes up by 2% a year after 30 years the annual pension would be 13.5/year. So you'd get your money back within 5 years.....a pretty good deal. Using the standard of 4% safe withdrawal rate if you had the 63.5k in an investment account it would only generate 2.5k/year. The class 3 NICs and state pension blow that away.

jb82

I'll assume i'm contributing voluntary class 3 for 35 years from 18 and that retirement age is 68.
Growth at 7.5% whilst I am contributing (age 18 to 53) and 5% for the 15 years afterwards (age 53 to 68) for a little more safety towards retirement. Contributions and final payout grow by inflation.
I'll assume as an alternative to the state pension I will invest the contributions in a retirement account with tax breaks.

I figure I'll have 100k by the end of 35 years (age 53) since I'm contributing for 5 extra years with more aggressive growth and tax benefits. I'll have 145k by retirement at 68 (all in today's terms)

Assuming a very optimistic 20yr life expectancy (to 88yrs old) I'd only need to get 1-2%pa to cover the same 7700pa (current state pension amount) withdrawal until death.

of course you take the risk of poor growth but gain the upside potential, inheritance potential and flexibility of withdrawing what you want at anytime (after 59.5 without penalty if I put it in a roth ira). Who knows in 50yrs interest rates could also hit 10%. Or you may die before 70 or close to it.

I don't think the class 3 ones are as good as you think but each to their own. And of course this is hypothetical as no one here pays in class 3 for 35 years from 18! Circumstance could tip it either way eg someone voluntarily contributing for one extra qualifying year at age 67 would get that money back in 3 years or so which is a great return. I think the closer to retirement you need to contribute the better.

Class 2 are obviously a no brainer.

Not that anyone is going to read this post

nun

I see things like state pensions as complimentary to other investments where I might assume 7.5% annual growth.......although with the risks inherent in the market and the poor way people invest and react to market down turns 7.5% might be optimistic for many portfolios. Also you have neglected longevity risk; state pensions are good for that. But you have mitigated the order of returns risk by going to conservative investments as you retire. However, shouldn't you have inflated the annual pension withdrawal over the working life?

Of course the next 50 years could be a disaster for equities and bonds, we can't know the future. Also SS is not just for the benefit of you or me, there are many people on low wages who benefit from it's progressive nature. The income floor provided by a state social security system has been one of the triumphs of 20th century government and I think we have short memories if we believe that opting out of them for some speculative better return wouldn't have negative effects of society as a whole.

We are always told that diversity is a good thing for our portfolios so we might have some Treasury bonds, corporate bonds, some US equites, some International equities etc etc. I believe that diversity in income sources is also important in retirement. So you get some income from the equity and bond markets, life time income from state pensions and annuities to avoid longevity risk and market downturns and maybe some income from a rental property. In that way you can be sure of stable retirement income.

jb82

True but then I'll assume US SS to cover that in my portfolio. Or buy an annuity with the 145k or part of it if you want. Its all throwing numbers in the air at the end of the day. I'm sure the government actuaries have done the numbers and made sure those class 3 voluntary contribution rates ensure the Government comes out on top on average. Some would beat it on their own and others will not.

For me state pensions have longevity risk in that you have to wait until 68 or even later (by the time I retire) to get anything. I've known men in my family to pass long before then. I tend to err on the side of controlling when I can take my retirement funds as a result.

nun

Yes US SS or UK basic state pension do the same thing.....of course US SS is a far bigger benefit than the UK and is earnings related....although still progressive.

When I moved to the US....29 years a go ...I read a book for expats and right at the front in big type is said "Apply to pay voluntary NI", so I did. It became a habit and with Class 2 being so inexpensive a good deal too. So now I'll get both US SS and UK basic state pension at age 66. The ironic thing is that because my NI was all voluntary WEP doesn't apply, but I'll still get my SS WEPed to the max because of my MA state pension.