From today, 12th October, the government is offering millions of people the chance to get a higher income in retirement, through top-ups to their state pension.
In many ways the scheme – known as Class 3A – looks generous. But it may not be the right thing for everyone, and indeed by doing so you may lose other ‘means-tested’ benefits.
Anyone who is already receiving a state pension, or is due to receive one before 6 April 2016 is eligible. That means that men are eligible if they were born before 6 April 1951. Women are eligible if they were born before 6 April 1953.
The idea is that such people should be compensated, as they will not be eligible for the new – and more generous – flat-rate state pension, which starts in April 2016. The current basic state pension is worth up to £115.95pw – the new flat-rate pension will be worth up to £155pw for those that qualify.
Any current pensioner can benefit. Those who live for a long time will inevitably get better value out of the scheme than those who live for a short time.
The maximum you can get is £1,300 a year, or £25 a week. This will be paid on top of the current state pension of £115 a week. How much you pay for that income depends on your age. For example, if you are 65, that £25 income would cost you £22,250. That is a one-off payment, which you will not get back. However, if you are 80 it would only cost you £13,600. You can chose to buy a smaller amount.
The government has produced a calculator to help you work out the costs.
Click here to access the calculator.
The top-up payments will rise with inflation, as measured by the Consumer Prices Index (CPI). In addition, spouses or civil partners will be able to inherit some of the payments, getting between 50% and 100%. The rules for passing on the payments are the same as they are with the additional state pension.
The scheme is not suitable for anyone who has not got a full National Insurance contribution record – frequently women or those who have been self-employed – as they are likely to be better off topping up through another existing scheme, known as ‘class 3’. That scheme is far more generous financially, but only applies to people who have not got a full contribution record.
However, anyone who claims means-tested benefits may see them reduced, as a result of their income being boosted by either of these schemes. In particular, anyone who claims the guarantee element of pension credit, housing benefit, or council tax support may be affected.
Anyone with a reduced life expectancy may not get good value for money out of it as well.
However, generally the top-up scheme represents very good value for money. Buying a top-up at the age of 65 provides an index linked annual return of 5.84% on the payment you make, which is much higher than an inflation linked annuity – which will currently provide approximately 3.7%.
However, for some people potential higher investment returns and control of the capital may be overriding considerations. But, unlike top-up payments, such investments do carry a level of risk.
The scheme will only run for 18 months, so is due to finish in April 2017. To register an interest, or to get more information, please visit the DWP website (www.gov.uk/statepensiontopup). It is estimated in the region of 265,000 will take up the offer out of the 7 million it is open to.
If you would like to discuss your own retirement planning situation, please contact us >>