97% off annuity rates – with Class 2 NI contributions

Annuities are dear, so if someone offers you 97% off, you run, not walk to take them up on it. If you are an early retiree, don’t leave State Pension on the table. You need to get enough NI to get a full SP before you reach SP age, though don’t be in too much of a hurry to pay extra years until you are in the endgame of working.

I’ve always wanted a good reason to pinch this pic from Monevator’s post that kicked me up the backside to get into the market in 2009, and now I have it

The Ermine declared himself done with work in 2012, and little has occurred in the intervening seven years to make me enamoured with the idea of working again. I’d reconsider if I were going to live forever, or perhaps even to 150+.  Despite Monevator’s exhortations to the educated erstwhile specialists among us to get their asses back into the workforce – on a post ironically titled Choose Time, I can’t be arsed, I’ll choose time, thanks.

There’s enough of interest in the world to keep an Ermine mind occupied in all those long hours I used to spend working, provided one has enough income. The definition of enough varies from person to person. I am not of the view that one needs enough to keep one’s yacht afloat and staffed, although I do wonder at some of the assumptions some FI/RE aficionados bake into their lives with extreme frugality in retirement. I get more in favour of creature comforts as I get older – I have managed to get to fifty-something never having spent a night in a tent and there needs to be an exceptional reason to break the habit which should be more than ‘it’s cheaper’ 😉

However, although I never wanted to darken the Man’s threshold again after I retired, I haven’t totally avoided making money in the intervening years, and that tended to go with the tedium of filling in a self-assessment tax return. I have just completed one for the last year. It isn’t onerous in my case, I have absolutely no investment holdings outside an ISA or SIPP, I made a modest amount of money last year though above the £1000 no need to declare level. I took the opportunity to pay voluntary Class II National Insurance payments, to get an additional year of State Pension entitlement.

Early retirees are likely to be short of NI contributions, you need 35 years of contributions to get a full State pension. I am OK on this

The Ermine NI record

It’s not too bad in my case – Thatcher’s shock doctrine to the economy in the early 1980s meant it took me to the February after graduating to get my first job, hence only 13 weeks of lost contributions. That would have been 26 weeks lost if I had got a job on graduating. But money is short when you are starting out, and making this up is pointless if you don’t aim to retire early. I can’t really give my younger self a hard time for not making it up. Taking time out of the workplace for children doesn’t count because you get NI credits for all the child-related benefits handed out, so it doesn’t count as time out for NI.

Self-employment is the greatest NI scam there is

Those poor grunts on PAYE don’t have any choice on how much NI they pay, with one exception – if their employer offers salary sacrifice pension contributions, then instead of a basic rate taxpayer getting a 20% boost on what goes into their pension it goes up to 32%, because the NI is saved as well.

The self-employed, however, have all the tricks in the book, and at the higher end, they control the tax they pay as well. However, at the bottom end where I am, it only costs me £160 to voluntarily pay Class2 NI contributions for a year. If I look at my State Pension forecast

I am still short, because I was contracted out of the State Pension for a significant amount of time. Those NI payments went into my company pension instead. I happen to know that I paid my 2017/18 Class 2, as well as the 2018/19 I have just paid. They are not swift on updating this, I guess because most people leave their tax returns until January in the following year. So if I need another three years contributions, I already have two in the bag.

I am tempted to stay self-employed this year. I will probably earn £100 running a PA for some guys to justify it. I have to stay self-employed for a whole year, though it will take about a day to earn that £100, but what the hell. There’s been a fair amount of scuttlebutt about them wanting to kill off Class 2 NI contributions, presumably because of their terrific value. But it appears that there has been a stay of execution until the end of this parliament, probably on the grounds that they can’t think about such trivia at the moment.

In theory that is to April 2022 but it is unlikely that the immovable object of Teflon Theresa is going to hold out against the irresistible force of Brexit Gotterdammerung until then. I can probably count on Class 2 NI being available for this tax year since it has already started. After that I don’t give a toss, because I will have as much SP as it’s possible to get, even with my wastrel 30 years of real employment. The current position on NI seems to be that the abolition of Class 2 contributions has been abolished.

So what do I get for my £450 over three years? An inflation-linked annuity backed by the government of about £10 a week, or about £567 a year. In reality I will only get to see £450 a year, because I will pay tax on all of it.

If I look at a quote to buy an inflation-linked single life annuity now to happen at 67 with £100,000 I get £3287 p.a. which is about five times the (pre-tax) increase in SP. So buying £567 p.a. at this rate would cost me £21500, which is 47 times dearer than the actual cost. It’s tough to argue with that sort of odds, although I have to try and live to 70 to break even. I will lose out if I suddenly see the wisdom of Monevator’s words and re-enter the workforce in the next few years, though if I leave it till after 67 to discover my undying love for spending more time in the office then I will be OK – I won’t pay NI under current rules.

The sharp-eyed will observe there’s another way to buy an extra year’s NI – I could pay £780 for the year after I retired. Now that’s still pretty good value in many ways. After all, at annuity rates it would cost me £7200 to buy that year’s income, which is still getting on for 90% off. You’d break into a sweat to run after that sort of offer. But call me a greedy bastard, but filling in another tax return isn’t such a tough job to get the 97% off offer. The government gets to ignore the economically inactive Ermine for another year which is all good for the unemployment figures, and I get a great annuity deal. Sounds good to me.

Yes, there are things that can go wrong with the State Pension. One of the obvious ones is a future government deciding to means test it. I can’t predict what the future holds, but I will take the chance of it all going to naught for 97% off. I’d mull it over for £780, but for £150 it’s pretty much JFDI – now.