Why it's not always best to top up your state pension

Don't rush to join the Government's new scheme to get £25 a week more, says Chiara Cavaglieri

Pensioners will be able to boost their state pension by up to £25 a week after yet another tweak to the pensions system was announced this week. Early indications suggest that this opportunity has generous terms, but what are the likely benefits and what else should you be looking to do?

Right now, the most anyone can get from their basic state pension is £110.15 per week but under new proposals pensioners can use their savings now to make top-up payments to get as much £25 extra per week. The scheme will open in October 2015 when the Government introduces a new class 3A of voluntary national insurance contributions (NICs), available to existing pensioners and anyone due to reach state pension age before April 2016 when the single tier pension is brought in.

"If you have spare cash to devote to increasing state pension entitlement it will almost certainly be a good thing to do that," says Tom McPhail, pensions expert for Hargreaves Lansdown. "In principle the terms offered by the Government for these additional state pension deals look very attractive. Reports suggest an extra £1 a week of class 3A state pension would cost £900 to buy. On the open market, an inflation-linked single life annuity for a 65-year-old currently costs £1,468 for each £1 a week of income."

The finer details of the scheme will follow in the coming weeks but older pensioners can expect to get more generous terms. The extra payment is also linked to inflation, so while £900 might buy £1 per week extra in year one, it will rise with the index year after year. The maximum top-up will be set between £20,000 and £25,000.

This new deal will provide something of a sweetener for people feeling disgruntled that that they will miss out on the higher flat rate pension of £155 a week when it is introduced on April 6, 2016. It is also being pushed as a golden opportunity for women, many of whom often miss out on the "additional pension" which is added to the basic state pension, to get more from the state.

Richard Watkins, from Close Brothers Asset Management, says: "With just over two years to go it is worth taking this opportunity as soon as possible. This is particularly relevant for women, who often live longer than men and who may have taken time out of the workplace to raise a family and not made voluntary contributions during that period. The self-employed may be attracted as well, as they may have made lower contributions in the past and are entitled only to the basic state pension".

With savings interest rates so poor, a product with built-in inflation proofing is an attractive prospect, particularly as there will also be survivor benefits offering protection to spouses. However, if savings rates return to form will this look as generous as it does today?

Craig Palfrey, from pension advice website Increase Your Pension, says: "If income and savings rates escalate in the future, as they are likely to do, this Government pension deal could look decidedly second-rate".

It is also worth noting that in December last year, after the Government first unveiled these plans, a survey of over 1,000 people found that most people were not interested in taking part. Even if it does prove popular there are aspects of this scheme that pensioners should be wary of - for example the pension income will be taxable, which may make pensioners think twice before they choose this over putting the money into a tax-free vehicle such as an ISA (individual savings account).

"Anyone who suffers from ill health could probably secure a better than market pension income – so they should not judge this top-up option against ordinary pension rates. Instead they should examine how much income they could secure from a comparable product where their health is considered," says Mr Palfrey.

The safest way to decide whether this is a good idea for you is to see how it might work in conjunction with any other financial arrangements you have such as private pensions, mortgage debt and any other savings or investments.

Voluntary NICs already exist for people who need to fill any gaps in their national insurance records. The rules state that you need 30 years of contributions to qualify for the full basic state pension but many people can make up for lost years so that they don't miss out. Usually any top-up payments must be made within six years but there are some exceptions, for example people reaching the state pension age before 5 April 2015 may be able to pay voluntary NICs dating as far back as 1975.

If you can, deferring the state pension is currently rewarded fairly handsomely. If you continue to work beyond retirement age, part-time or otherwise, you don't pay national insurance on any income once you're over state pension age. Furthermore, the Government increases the pension by 1 per cent for every five weeks you put off claiming, or 10.4 per cent for every year. To illustrate, if you would be eligible for the basic state pension of £110.15 per week deferring for a full year would get you an extra £595 a year. As an extra incentive, if you defer for 12 consecutive months you can choose to take the extra money as a one-off lump sum, which will include interest at 2 per cent above the Bank of England base rate.

The best place to start is with a state pension forecast which gives you an estimate of the basic and additional state pension you will be entitled to based on your NICs so far. Clearly the further away you are from retirement the more opportunity you have to work and build up qualifying years, but you may also be able to use your partner's contributions to improve your state pension without forking out for voluntary NICs.

Any extra help is worth looking into – one in three people who are entitled to Pension Credit fail to claim it, potentially missing out on hundreds of pounds a year, tax-free. This benefit is means-tested but the first £10,000 of any savings and investments is ignored. It currently comprises two parts - guarantee credit (which tops up your income to £145.40 a week if you're single or £222.05 if you're married or in a civil partnership) and saving credit (up to £18.06 a week for a single person, £22.89 for married couples/civil partners).

Independent Partners: 10 top tips for retirement. Get your free guide here

PROMOTED VIDEO
Sport
Kim Sears is reported to have directed abuse at Berdych
tennis
Arts and Entertainment
Cold case: Aaron McCusker and Christopher Eccleston in ‘Fortitude’
tvReview: Sky Atlantic's ambitious new series Fortitude has begun with a feature-length special
Voices
Three people wearing masks depicting Ed Miliband, David Cameron and Nick Clegg
voicesPolitics is in the gutter – but there is an alternative, says Nigel Farage
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
News
i100
Voices
A mother and her child
voices
News
people
Sport
Chelsea manager Jose Mourinho
footballThe more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Life and Style
Vote green: Benoit Berenger at The Duke of Cambridge in London's Islington
food + drinkBanishes thoughts of soggy school dinners and turn over a new leaf
News
Joel Grey (left) poses next to a poster featuring his character in the film
peopleActor Joel Grey comes out at 82
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    MBDA UK Ltd: Indirect Procurement Category Manager

    Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee