Justin Modray (Investment and Pensions Adviser) gives expert video advice on: What is national insurance?; How long do I have to pay national insurance for before I qualify a pension?; I'm paying national insurance, should I organise a private pension on top? and more...
What is national insurance?
National insurance is really a form of tax very much like income tax. In theory, it is used to pay state pensions. So those people who are working in effect are paying for those people who are in retirement. It is about ten percent or so for employed people. If your self employed there is a different scale, but it more or less comes out the same. In effect it is a way to fund the basic state pension.
How long do I have to pay national insurance for before I qualify a pension?
At the moments a man has to pay national insurance contributions for 44 years to get a full state pension, and a woman 39 years. There are plans to actually change this which may or may not happen, but if the government does go ahead with the proposals, this could go to 44 years for both men and women, possibly for 2012.
I'm paying national insurance, should I organise a private pension on top?
National Insurance contributions really just fund the basic State Pension, which, for most people, isn't enough to live on in retirement. Now, sometimes they can also fund what's called the State Second Pension, which is a bit of extra pension on top of the basic State, but it's still not, again, enough for most people to live on. So it is quite important to look to augment that with additional pension of some form. Personal pension is a good way of achieving that.
How are my national insurance contributions paid?
If you are an employee it is actually very straightforward, because your employer will normally deduct national insurance along with income tax automatically from your salary each month, and you probably won't even notice. If you're self-employed it is a little more complex because you have to fill in the form and actually send the money to the Revenue yourself. Sometimes this can actually be done by direct debit, so that does make life a little simpler.
What if there are gaps in my national insurance contributions?
Short term gaps shouldn't actually make much difference. Provided, as a man you put in 44 years worth of contributions; or a woman, 39 years worth, you'll still get the full basic state pension. Though when you retire, and you actually have less than that paid in then you do have an option to actually top up. You can backdate payments going into the state scheme. It may be worth while to do that. You need to check to see whether you're getting value for your money. But for most people it can make sense to actually top up if they miss too many years.