Nic knack: how much do you really need to pay to get the state pension?

So you've made a new year's resolution to build up your pension funds, and you're putting in all the legwork needed to make the right investment decisions. One big problem remains: what to do about voluntary national insurance contributions (Nics).

As many as 250,000 Britons pay these to make up for missed payments in the past, usually because they've been working overseas, had long periods of unemployment or taken a long career break to care for children. Voluntary Nics are crucial if you won't otherwise qualify for a minimum state pension.

To get the basic pension under the current rules, you must have paid Nics for 90 per cent of your working life, which is normally 44 years for men and 39 years for women.

However, under proposed reforms set out in last year's Pensions Bill, people reaching state retirement age after April 2010 will need to have paid Nics only for 30 years. As a result of this lowering of the threshold, there is now growing concern that many voluntary payers may be wasting their money.

So the question is, should they keep on paying?

If you have already paid contributions for 30 years, or expect to do so, it might seem sensible to abandon voluntary Nics and hang on to your money.

But it's hard to say for sure. Accountant Peter Arrowsmith, who runs his own national insurance contributions consultancy, says the situation is very unclear because there is no guarantee that the finer points of the Pensions Bill will actually reach the statute book.

"This is not just some clause in the Finance Act that can be nodded through. It is social security legislation that needs to be enacted," he says. "It could take up to a year for the Bill to be passed, and if Chancellor Gordon Brown [pictured right] becomes Prime Minister and immediately calls an election, he could lose and the Bill could be scrapped by an incoming government."

Although many see this as a long shot, it's still a possibility.

The decision on whether to keep going with voluntary Nics is all the more pressing because of a "deficiency" letter sent out by Revenue & Customs in October to all those facing a potential shortfall in their Nics for a basic state pension.

"Every year, Revenue & Customs writes to millions of non-working people inviting them to pay voluntary national insurance contributions," says Adrian Boulding, director of pensions strategy at insurer Legal & General. "But the new rules that apply to those retiring after April 2010 mean many people should now decline the invitation."

Mr Arrowsmith recommends a "wait-and-see" approach. "Personally, I would do nothing now except make a diary note for 18 months' time and see if the situation is clearer by then."

He adds: "What is certain is that if you pay now and you don't need to, you won't get your money back later. That's because if you are paying voluntarily after being invited to do so under the current rules - which is perfectly proper - there is nothing that says you have to be reimbursed if this turns out to be a bad decision because the rules subsequently change."

Losing out in this way could result in a considerable financial hit. According to recent calculations by insurers, a woman who pays extra Nics to make up the 39 years' worth of contributions, when she needed only 30, could overspend by as much as £3,200 - and get none of it back.

Nearly everyone who works either for an employer or for themselves is obliged by law to pay national insurance.

At present anyone who does not work, or is otherwise not compelled to pay, risks not reaching the number of qualifying years for a basic pension. If they have enough savings, these people can pay a voluntary "Class 3" contribution of £7.55 a week to make up the shortfall.

The current rules protect low earners and benefit claimants by giving them credits for contributions without asking them to part with any money.

Those receiving credits include people on very low incomes (earning between £84 and £97 a week in 2006-07), the registered unemployed and anyone caring for a disabled person.

Those who spend at least 35 hours a week looking after someone who receives attendance allowance, disability living allowance or constant attendance allowance, or who is a registered foster carer and is not receiving child benefit, needs to apply for "home responsibilities protection", which sparks an NI credit.

Under the new rules, which will affect only those who reach retirement age after April 2010, home responsibilities protection is to be replaced with a system of credits for carers. The number of qualifying years here is also to be reduced to 30, and this can be made up of any combination of years of paid work or caring.

Are you on target for your pension?

The first thing to do is check whether you are heading for a shortfall in your national insurance contributions.

If you have not received a letter from Revenue & Customs, get hold of a state pension forecast. This will tell you how much NI you have paid already and what level of pension you are likely to receive when you come to retire.

You can obtain this forecast by filling in form BR19, which is available either as a download at www.thepensionservice.gov.uk, by phoning 0845 300 0168, or by writing to: the State Pension Forecasting Team, Future Pension Centre, The Pension Service, Tyneview Park, Whitley Road, Newcastle upon Tyne NE98 1BA.

If you have 30 years' worth of contributions under your belt, or think you will have by the time you reach your sixties, you could put your money into a different pensions savings vehicle or an individual savings account.

Mr Boulding at Legal & General says: "In many cases, a full basic state pension will now accrue as a result of 30 years of working and caring, so the voluntary Nics are unnecessary. Why not pay into a personal pension instead?"