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Ever worked in the UK? This is the pension loophole opportunity of a lifetime you need to know about

Workers who did everything from digging ditches to brain surgery in Britain and Northern Ireland have been offered a deal that could deliver around $5000 a year in retirement for a one-off payment of as low as $3100.

The UK State Pension opportunity of a lifetime is available to people who have worked in Britain or Northern Ireland for at least three years and have not yet hit official UK retirement ages.

It comes thanks to rules running until 2023 allowing millions of baby boomers and younger folk to make UK National Insurance contributions for missed years as far back as 2006-07.

Britain not only has some superannuation-like private pension funds, it also has a generous State Pension system, where your entitlements are generally built around the number of UK tax years you have contributed to the scheme.

This system generously lets eligible former UK workers now living abroad make their annual contributions at one-fifth the rate paid by people still working back in the UK.

It’s available regardless of whether the workers were a citizen or a visitor when they worked in the UK.

A new UK State Pension was introduced on April 6, 2016, that covers:

  • Men born after the 1951-52 UK tax year started on on April 6, 1951; and
  • Women born after the 1953-54 UK tax year started on April 6, 1953.

Official UK retirement ages are being cranked up from 60 for women and 65 for men all the way up to 67.

Under the new scheme, you will need to have made 35 years of National Income scheme contributions to qualify for the full rate State Pension.

This full pension is £164.35 a week but will rise to £168.10 on April 6. Eligible people get 1/35th of the full pension for each year of National Insurance contributions, provided they have reached a minimum 10 years of contributions.

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UK pension top-up rules generally only allow you to top up for the six past UK financial years.

But special provisions allowing contributions going back to 2006-07 were introduced as part of complex arrangements to fairly shift people on to the scheme that started in April, 2016.

One adviser said eligible people could make contributions for the 12 prior financial years for as little as £1687.60. Based on the 2018-19 pension rate, this would boost their pension entitlement about £2930 a year.

Kensington Wealth financial adviser and UK pension specialist Colette Pieniazek said someone who only needed to make five years of National Insurance contributions to get the full pension could choose the cheapest five years available from the dozen now available.

“If you have got 10 years, why not top up the 10 years,” Ms Pieniazek said. “We’ve got a lot of Australians who worked there topping up and getting the maximum age pension.”

The best-case scenario is that you can qualify to pay the heavily discounted Class 2 contributions, which were designed for self-employed UK workers. People now working abroad can be eligible to pay Class 2 if they worked in the UK for at least three years and were working immediately before their departure for warmer climes.

Most employees in the UK must pay Class 3 contributions that cost £14.65 a week, or £761.80 for the UK’s 2018-19 tax year. Class 2 contributions are a bargain basement £2.95 per week, or £153.40 for the 2018-19 financial year.

A full-year contribution will generate an extra £245 of annual pension based on 2018-19 rates — a smashing 160 per cent return.

The worst scenario is that you have to pay Class 3 contributions.

The £761.80 buys you an extra 1/35th of the £164.35 maximum weekly pension. This again is a bonus of £245 a year indexed from when you retire until when you shuffle off the mortal coil.

Your potential return on the £761.80 outlay is still an impressive 32 per cent for life. If you live a tad over three years after retirement, you’ll have your money back and you’ll be winning as long as your living.

But there’s a few risks to work through. UK State Pension income is treated by Centrelink in much the same way as other non-investment income. The amount you have contributed to the UK is not included in your assets test, but State Pension payments do come into calculations for Centrelink’s income test.

These UK payments are subject to normal income test thresholds in means testing if you’ve been in Australia for more than 10 years.

The Centrelink test threshold for singles is $172 a fortnight and $304 for couples. Once your income exceeds your threshold, you’ll lose 50¢ of Aussie pension for each dollar from the UK.

With the new UK system, the contributed amount are generally lost if you die.

The exchange rate can be a risk. At present, the volatility surrounding Brexit has led to the pound plunging, meaning now might not be a bad time to make your contributions.

But those receiving payments from the UK have had their pension value fall considerably.

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