National Insurance Rebates Explained
A National Insurance Refund is an opportunity to rebate some of your NI contributions into your own pension plan.
Am I eligible?
Anyone who is resident in the UK and has a Permanent National Insurance number is eligible.
What does this mean for me?
As a UK taxpayer, you and your employer have to pay NI contributions. These funds go towards the Basic State Pension and the State Second Pension. The Basic State Pension is Compulsory however you can choose to opt out (Contract Out) of the State Second Pension. The Government will then rebate some of your National Insurance to you to invest in your own pension. You don't have to contribute anything extra to contract out; you are simply choosing to direct your funds to your own personal pension fund which will be set up as part of this NI refund process. Please note that the ability to contract out of the State Second Pension ends in 2012 i.e. beyond this point you will not have the ability to make the this choice.
Who should do this?
If you are younger (below 43) or intending to retire outside the UK, you could benefit from this refund. There are however risks and other influencing factors you need to be aware of. Make sure you read the full website carefully and if you are still unsure speak to a financial adviser.
Why is the refund not in cash?
The government will not allow you to take this as cash as they would like you to save for your retirement, but they will allow you to divert the money into a pension of your own.
What are some of the advantages?
- If you intend to retire outside the UK, EU or US you will benefit more from this rebate than someone retiring in the UK. This is because the government has frozen increases in the pension for people retiring outside these jurisdictions.
- By claiming a rebate you have the ability to move the pension with you to other countries when you leave the UK.
- You (and not the government) have complete control of your funds.
- You can take the proceeds from your pension earlier (age 55 rather than age 65).
- The rebate allows you to take 25% as a cash lump sum when you retire.
- If you die before your retirement age your heirs can benefit from your remaining fund.
- You can choose how you would like your funds invested (remember investments can go up as well as down).
- You are still eligible for the Basic State Pension, it is only the Second State Pension you are opting out of. You will also continue to be opted in for the State Second Pension for prior years and not lose those benefits.
- With the rebate, you become responsible for the investment of the funds. If you invest badly you may lose money and be worse off than before.
- If invested poorly, the amount of the refund may ultimately be less than what you could have received from the government when you retire. This is particularly true for people over the age of 43 looking to retire in the UK.
- Neither the State Basic Pension, the State Second Pension nor this contracting out pension will be sufficient for your retirement needs. You will still need to provide for your future with a supplementary savings plan.