To voluntarily contribute to UK State Pension from abroad, or not?

[achristinekim]

Hello Bogleheads,

I've got a Q I'm chewing over...I'm a US citizen who's lived and worked in the UK for 6 years now, so I've been contributing to National Insurance (NI) for that long. I've contributed roughly 18,000GBP through my employment. Apparently, my only options for benefiting from these contributions from abroad is:

A) If I ever need to get government welfare services, e.g. unemployment benefits, I can get them to draw down from the UK NI since the two countries share a social security agreement. Barring this,
B) If I continue making voluntary contributions of 65GBP/mo for at least 4 more years from abroad, I could get some State Pension (the minimum qualifying years has to be 10 years, and I've contributed 6 years so far).

According to the UK government's State Pension forecast, when I hit retirement age, I can get 185GBP/wk, if I were to contribute for the full 35 years. If I were to contribute the bare minimum and hit 10 years, then I'd get 52GBP/wk (basically, 185GBP multiplied by (10/35 years)).

So as a hypothetical:

If I contribute a full 10 years (4 more years), I'd pay 65GBP/mo x 48 mo = 3,120GBP total. At retirement, I'd receive 2,496GBP/yr until I die. Assuming I live at least another 10 years after this mark (lol getting morbid here), this would be a return of ~25k GBP.
If I contribute the full 35 years (29 more years), I'd pay 22,620GBP total. At retirement, I'd receive 8,880GBP/yr until I die. Assuming I live another 10 years, this would be a return of ~90k GBP.

Of course, this income from the UK could be taxed on the US side. No clue what law will be in place by then, but assuming that's also a factor...

So the Q is, if you were in my shoes, would you keep contributions alive and going? And if so, would you opt for minimum for some pocket change at the end, or go the full length to get the ~9,000/yr? Or would you write off the 18k GBP you already sunk in?

NB: I realise this varies depending on how healthy my other investments are in my portfolio, but assuming the average portfolio mix that includes Stocks, Bonds, my Roth IRA, it seems like writing this off is best? As painful as it is to say, as I feel like I'll be losing the 18k I already sunk in...(and normally, I'd be fine with this because it goes to good causes, like the national health service, but as a migrant to the UK I already pay for this separately in a "surcharge" for every year I've been here, so this feels like double-dipping by the UK govt lol).

[Valuethinker]

Hello Bogleheads,

I've got a Q I'm chewing over...I'm a US citizen who's lived and worked in the UK for 6 years now, so I've been contributing to National Insurance (NI) for that long. I've contributed roughly 18,000GBP through my employment. Apparently, my only options for benefiting from these contributions from abroad is:

A) If I ever need to get government welfare services, e.g. unemployment benefits, I can get them to draw down from the UK NI since the two countries share a social security agreement. Barring this,
B) If I continue making voluntary contributions of 65GBP/mo for at least 4 more years from abroad, I could get some State Pension (the minimum qualifying years has to be 10 years, and I've contributed 6 years so far).

According to the UK government's State Pension forecast, when I hit retirement age, I can get 185GBP/wk, if I were to contribute for the full 35 years. If I were to contribute the bare minimum and hit 10 years, then I'd get 52GBP/wk (basically, 185GBP multiplied by (10/35 years)).

So as a hypothetical:

If I contribute a full 10 years (4 more years), I'd pay 65GBP/mo x 48 mo = 3,120GBP total. At retirement, I'd receive 2,496GBP/yr until I die. Assuming I live at least another 10 years after this mark (lol getting morbid here), this would be a return of ~25k GBP.
If I contribute the full 35 years (29 more years), I'd pay 22,620GBP total. At retirement, I'd receive 8,880GBP/yr until I die. Assuming I live another 10 years, this would be a return of ~90k GBP.

Of course, this income from the UK could be taxed on the US side. No clue what law will be in place by then, but assuming that's also a factor...

So the Q is, if you were in my shoes, would you keep contributions alive and going? And if so, would you opt for minimum for some pocket change at the end, or go the full length to get the ~9,000/yr? Or would you write off the 18k GBP you already sunk in?

NB: I realise this varies depending on how healthy my other investments are in my portfolio, but assuming the average portfolio mix that includes Stocks, Bonds, my Roth IRA, it seems like writing this off is best? As painful as it is to say, as I feel like I'll be losing the 18k I already sunk in...(and normally, I'd be fine with this because it goes to good causes, like the national health service, but as a migrant to the UK I already pay for this separately in a "surcharge" for every year I've been here, so this feels like double-dipping by the UK govt lol).

Hello

Are you planning on staying in the UK? You should definitely pay in.

If you are returning to the US then it's important to understand the implications vis a vis US Social Security & US tax (some states tax SS differently?). I can't help you there.

But it's worth knowing the money will be indexed to UK inflation (until this year, it was inflation + 2.5%). That's a very valuable promise. And your widow(er) will receive a share of the pension (at least my mother does, and she never lived in the UK, just married a Brit).

However if you live in Australia or Canada you won't get that inflation increase. But you will in the USA. It varies by country. I don't know what the situation is with the EU countries going forward. It's an anomaly the UK government never bothers to fix -- because it would cost them money and they do not have to.

Generally because this is a risk free stream of income (albeit with currency risk if you don't retire in the UK), and if you return to the UK you get it in full, then this is a very good investment. And I do mean risk free, because the purchasing power is (mostly) protected - RPI indexation (but not this year) which will be CPI (lower) after 2030. UK government is very unlikely to default on this (there are lots of other things they can do to raise money).

Is it a good investment? I don't know. But it's a risk free investment, pretty much, that pays a return. Really equivalent to a portfolio of Index Linked Gilts (ie TIPS). To get that benefit right now you'd need to pay an annuity premium of 50x at least (ie £1k pa would cost £50k at age 65).

The actuarial rule of thumb is to multiply the benefit by 20x. That gives you a lump sum value at state retirement age. Then discount back to the present day. You might use 3% real discount rate (so we don't have to worry about inflation). ie x 1/ (1+0.03)^30 if you are 37 right now.

One other wrinkle is the state pension age is now 67, but may be raised in future. So that would lower the present value. So in that sense you have "policy risk" depending on what future UK governments do with pensions (but pensioners vote). FWIW we are not Italy, we are not in a position where state pensions will become an unsustainable part of government spending. The UK has some of the lowest state pensions in Europe so that is not surprising.

[achristinekim]

Thanks! I should have clarified, I almost certainly won't be returning to live in the UK, nor will I retire here (in my dream world, I'd be able to retire to New Zealand instead lol).

So basically, I wonder if it's worth contributing to NI from abroad when I'll probably spend the majority of my life in the US...

[achristinekim]

Thanks! I should have clarified, I almost certainly won't be returning to live in the UK, nor will I retire here (in my dream world, I'd be able to retire to New Zealand instead lol).

So basically, I wonder if it's worth contributing to NI from abroad when I'll probably spend the majority of my life in the US...

[asset_chaos]

I suspect that any UK public pension you may recieve will cause a more or less equivilent reduction in social security benefits via the Windfall Elimination Provision (WEP). You'd like to believe that the UK-US tax treaty would permit the social security administration to count your UK earnings towards social security coverage---and vice versa---but I don't think that's true. Most likely the WEP would reduce social security by whatever amount the UK pension gave. As such, it's probably less hassle to just write off the 18k pounds and not send more money after it.

[Valuethinker]

I suspect that any UK public pension you may recieve will cause a more or less equivilent reduction in social security benefits via the Windfall Elimination Provision (WEP). You'd like to believe that the UK-US tax treaty would permit the social security administration to count your UK earnings towards social security coverage---and vice versa---but I don't think that's true. Most likely the WEP would reduce social security by whatever amount the UK pension gave. As such, it's probably less hassle to just write off the 18k pounds and not send more money after it.

Thank you.

That's the piece I was missing - how it integrates with US SS. US SS is significantly more generous than Basic State Pension in the UK.

I wonder if Ted Swippet has a view? As he was a Brit, working in USA, who eventually retired back to old Blighty. No doubt because of HM the Queen .

OP. I don't know New Zealand's rules. But Canada and Australia, the lack of a reciprocity agreement means your pension is *not* indexed to inflation if you emigrate there. So the whole thing is just a disaster... which no British government has any incentive to fix.

[Zennor]

I suspect that any UK public pension you may recieve will cause a more or less equivilent reduction in social security benefits via the Windfall Elimination Provision (WEP).

WEP does not apply if someone has 30 years worth of contributions into Social Security. Below 30 years there is a (complex!) sliding scale.

[achristinekim]

I suspect that any UK public pension you may recieve will cause a more or less equivilent reduction in social security benefits via the Windfall Elimination Provision (WEP).

WEP does not apply if someone has 30 years worth of contributions into Social Security. Below 30 years there is a (complex!) sliding scale.

Ah...thank you for this flag. So basically (short of knowing my future), I'm making a bit of a gamble:

OPTION 1: Pay into UK National Insurance for at least 4 more years to qualify for UK State Pension. If I work in the US for another 30 years, then I'll also qualify for full Social Security benefits (no WEP deductions). But if I don't work in the US for another 30 years, then the risk is that there will be deductions that are presumably larger than any pension I'd get from the UK (since the UK is stingey with pensions).

OPTION 2: Don't pay into UK National Insurance and write off the 18k already paid. If I work in the US for another 30 years, then this option would become suboptimal, since I could have qualified for both US Social Security and UK State Pension benefits, fully. If I don't end up working in the US for 30 more years, then this option would become the better bet.

TL; DR, it seems from what you're saying, the gamble hinges on whether I anticipate working in the US for 30 more years. Did I miss anything?

[TedSwippet]

Did I miss anything?

Reading quickly through the thread, I didn't see any mention of the US/UK totalization agreement. Based on what you've written so far, it looks to me like you should be able to use it to have your UK NI payments count for US SS (meaning you don't have to "write off" anything paid so far).

Agreement Between The United States And The United Kingdom

[Caliscotsman]

What NICS can you pay. Class 2 or 3?

[achristinekim]

What NICS can you pay. Class 2 or 3?

I can pay Class 3!

[Caliscotsman]

You can check the rates of Class 3 and calculate if it's worth it.
I pay class 2 to get to 30 years, which is a no brainer. In addition the public pension is being increased.

[achristinekim]

Did I miss anything?

Reading quickly through the thread, I didn't see any mention of the US/UK totalization agreement. Based on what you've written so far, it looks to me like you should be able to use it to have your UK NI payments count for US SS (meaning you don't have to "write off" anything paid so far).

Agreement Between The United States And The United Kingdom

Thanks! From reading page 5, "If you already have enough credits under the U.S. system to qualify for a benefit, the United States cannot count your U.K. credits." it seems this agreement is only in my favour if I don't work for 30 years in the US. If I do work 30 years in the US, then my UK benefits are ineligible...

[achristinekim]

You can check the rates of Class 3 and calculate if it's worth it.
I pay class 2 to get to 30 years, which is a no brainer. In addition the public pension is being increased.

Thanks! Can you give more details on the no brainer part for you? It might help me make my decision. Is it because of what I wrote above, that as long as one works for 30 years in the US, one can claim UK benefits as well as the full US social security benefits?

[grabiner]

I suspect that any UK public pension you may recieve will cause a more or less equivilent reduction in social security benefits via the Windfall Elimination Provision (WEP).

The maximum loss to the WEP is half the pension benefit you receive, so it can't be a total loss. Also, the maximum loss depends on how many years you worked in the US; if you have 30 years of earnings subject to SS, then you are exempt from the WEP.

[halfnine]

It is quite likely that contributing 4 years to get the 10 year minimum is a viable strategy. Although, it would be best to delay this contribution as long as possible (see below).

Each additional year is a different story and you'll simply need to do the math along with the probabily you will spend 20-30 years contributing in the USA to decrease the WEPs influence. The best starting point for this analysis would be (if possible) is to resume contributing at age 42. This would allow for the remaing 25 years of contributions up to age 67 (if this is the final qualifying date). Obviously the later years would be more viable than the earlier years as the return on your investment comes much sooner. It is quite possible that contributing the last 10-15 years might make a lot of sense and contributing the first 10-15 years not so much. But, of course, all of this is dependent on whether one can opt in/out at any point along the way.

[Caliscotsman]

[/quote]
Thanks! Can you give more details on the no brainer part for you? It might help me make my decision. Is it because of what I wrote above, that as long as one works for 30 years in the US, one can claim UK benefits as well as the full US social security benefits?
[/quote]

UK citizen living in the US.
For me, I pay class 2 and they're like 3 pounds to 'buy a UK week' compared to @ 15 pounds for class 3.
And you can pay for the full 30 years this way so that you don't need to actually have to live/work that length of time.
So, a year's worth of class 2 is @ 160 pounds for a year.

I can't, for the moment, remember why I qualified for class 2.

I'm also not sure if WEP comes into it.

[achristinekim]

Thank you all for responding. It's been almost a year, but I keep coming back to this thread to reread everyone's advice because I've spent the past few months trying to get both US SSA and UK NI staffers to give clarity, but only come up against silence or non-answers (very confusing non-answers too).

Seems that the best course of action is:

1. Hold off on making any overseas (Class 3) contributions to UK National Insurance QUESTION: is there a deadline here? I.e. I need to start contributing within X years of having moved abroad, or else I can't contribute anymore?

2. See if I'll hit 30 years of working in the US. If I do, then WEP doesn't apply. At this time, start contributing Class 3 to UK NI until I hit the minimum 10 years (I've got 6 years, need 4 more years).

3. At retirement, receive benefits from both US and UK sides.

Did I get that right?

[TheDogFather]

We will be in a similar situation and are looking for information that would allow us to calculate the impact of WEP. We are US residents and do not plan to return to the UK. We are investigating the benefit of 'topping up' UK State Pensions to increase the amount but are concerned about how much WEP will make it a waste of money. In our situation my wife's SS will be minimal but the SS spousal benefit will be about a third larger than a full topped-up UK pension. Neither of us has 30 years of SS contributions to avoid WEP.

Have you found any US source who is familiar enough with WEP to do the calculations and also the impact of the US-UK Totalization agreement?

[arby99]

Hi All

Trying to make a determination for this for my wife. We have been in the US for 15 years and are now dual citizens. When i reviewed her pension status in the UK I can see that she has not made any NI contributions since we left but she made 20-years of full contributions when we left so still has to make a further 15 years to get a full UK pension. Each additional year will cost ~GBP800 and will add an additonal ~GBP300 per year. While this seems like a no brainer if it will reduce her US Social Security then maybe we just leave it as it is. She has another 12 years until she reaches retirement age in the UK and USA (age 67). She has only so far paid 10 years of social security in the USA so this would increase to 22 if she worked to 67 which is the plan.

Its obviously a complex set of calcuations but I wonder if there is either a tool or someone I can look to for advice.

Many thanks for any help.

Arb

[Valuethinker]

Thank you all for responding. It's been almost a year, but I keep coming back to this thread to reread everyone's advice because I've spent the past few months trying to get both US SSA and UK NI staffers to give clarity, but only come up against silence or non-answers (very confusing non-answers too).

Seems that the best course of action is:

1. Hold off on making any overseas (Class 3) contributions to UK National Insurance QUESTION: is there a deadline here? I.e. I need to start contributing within X years of having moved abroad, or else I can't contribute anymore?

2. See if I'll hit 30 years of working in the US. If I do, then WEP doesn't apply. At this time, start contributing Class 3 to UK NI until I hit the minimum 10 years (I've got 6 years, need 4 more years).

3. At retirement, receive benefits from both US and UK sides.

Did I get that right?

I managed to "catch up" one of 3 missing years in my NI record. There's a window, until early 2025 I think, where they are letting you catch up more than the usual number of years back.

If you Google Martin Lewis Moneysavingexpert NI contributions you should find his video.

TBH I would just do it, for the 4 years. At worst case you are no worse off (100% offset from US Social Security from UK State Pension). But you should do better than that. And you might not work the full 30 years in America - life and health have a way of getting in the way of best-laid plans.

Maybe you will be better off than if you had not done this. I can't see you will be worse off.

[Valuethinker]

Hi All

Trying to make a determination for this for my wife. We have been in the US for 15 years and are now dual citizens. When i reviewed her pension status in the UK I can see that she has not made any NI contributions since we left but she made 20-years of full contributions when we left so still has to make a further 15 years to get a full UK pension. Each additional year will cost ~GBP800 and will add an additonal ~GBP300 per year. While this seems like a no brainer if it will reduce her US Social Security then maybe we just leave it as it is. She has another 12 years until she reaches retirement age in the UK and USA (age 67). She has only so far paid 10 years of social security in the USA so this would increase to 22 if she worked to 67 which is the plan.

Its obviously a complex set of calcuations but I wonder if there is either a tool or someone I can look to for advice.

Many thanks for any help.

Arb

If you have the cash I would catch up the UK contributions. I don't *know* that this is the best policy, but I can't foresee a situation where she would be worse off (other than having invested that money in NI contributions for no return).

My father was in a similar position, but in Canada which has no treaty. His UK state pension was derisory (frozen and not adjusted for inflation). But, who knows, when he retired he might have returned to the UK, to be closer to his family and roots, and received a full state pension.

[TedSwippet]

While this seems like a no brainer if it will reduce her US Social Security then maybe we just leave it as it is.

Although I struggle to fully parse it, there is a suggestion in this SSA document that voluntary NI contributions are factored out of the WEP:

SSA - POMS: GN 00307.290 - Evidence of Foreign Pensions and the Windfall Elimination Provision (WEP) - 10/19/2022

Payments that cannot be used to apply the WEP Guarantee Provision
Some foreign pensions are not based in whole or in part on work performed after 1956. Therefore, the following foreign pension payments cannot be used to apply the WEP Guarantee Provision:
...
b. The part of a pension based on voluntary Social Security contributions that some countries allow individuals to make to increase the amount of their pension.

EXAMPLE: Individuals in the United Kingdom may continue to make (voluntary) Social Insurance contributions to that system during periods they are not working in covered employment or self-employment.

I think what this says is that your voluntary payments will not reduce US SS, but I can't immediately see how you would factor those out of monthly payments from a UK pension, or otherwise make this work in practice. Anyway, perhaps you can make sense of that better than me.

Its obviously a complex set of calcuations but I wonder if there is either a tool or someone I can look to for advice.

The SSA's own tool for this is here. It is not exactly intuitive:

Benefits Planner: Retirement | Windfall Elimination Provision (WEP) Online Calculator | SSA

Or, you could just hope that by the time you take SS, the government has repealed the WEP. Repeal comes up regularly for discussion (though of course, so far, zero actual action).

[arby99]

Thanks all for the help. I am thinking we pay a few years, say the oldest 5 years and then keep an eye on how this evolves. I asked our Financial Advisor if he could help but said it would cost almost as much as just paying the NI contributions so obv squashed that idea.