I have recently been contacted by the Inland Revenue asking whether I wish to continue my National Insurance contributions. What are the pros and cons? 

Spending part of your working life overseas can be disruptive for your pension arrangements, but with careful planning it may be possible to maintain the continuity of your retirement planning.
 
People leaving a UK pension scheme to work abroad have a number of options concerning their pension rights. These include leaving their benefits ‘frozen’ in the UK pension scheme, transferring their benefits to a personal pension plan and whether or not to make voluntary National Insurance Contributions.
 
Many expatriates who are no longer required to pay Class 1 National Insurance Contributions while working outside the UK choose to pay voluntary contributions to preserve their rights to certain UK contributory social security benefits. Indeed, many companies pay these contributions on behalf of their expatriates.
  
Voluntary contributions can be paid at either Class 2 or Class 3 level. Class 2 National Insurance Contributions are normally paid by people in the UK who are self-employed. However, for people who are working outside of the UK, it is possible to choose to pay Class 2 contributions provided the person is employed or self-employed.

Class 2 contributions protect more benefits that Class 3 contributions. In addition to the basic pension and bereavement benefits (which Class 3 cover), Class 2 contributions also protect incapacity benefit and maternity allowance upon return to the UK.

After the reduction in the Class 2 contribution rate for self-employed people to £2.00 per week from April 2000, voluntary Class 2 contributions became the more logical and cost-effective option. (Class 3 is currently £6.85 per week for 2002/03.) However, until recently, voluntary Class 2 contributions could not be paid where the expatriate was working in a country with which the UK had no social security agreement and where Class 1 contributions were obligatory for the first 52 weeks out of the UK per UK domestic legislation.

This advice was based upon the Inland Revenue's interpretation of the legislation and is currently set out in leaflets NI 38 and NI 132 (the main explanatory leaflets on National Insurance Contributions for people working outside the UK).

However, that interpretation has changed. It is now possible to choose to pay Class 2 voluntary contributions even after the compulsory 52- week Class 1 period. This is an important change since it provides NIC savings going forward and makes it possible to claim a refund for the difference between the Class 2 and Class 3 rates from April 6, 2000
 
If you are retiring overseas it is possible that benefits could be taxed there and in the UK - not all countries have double tax agreements with the UK. Even where such an agreement exists, the overseas country may tax any lump sum at retirement.
 
The treatment of pensions for individuals moving overseas is complex and this page only highlights some of the considerations. If this applies to you, specific advice should be sought before making any decisions to ensure that your pension arrangements best suit your personal circumstances.