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
Saturday 01 February 2014
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).
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Money Insider: Peer-to-peer lenders come into their own as marketplace lending evolves
Donald MacInnes: A church that pays a living wage? Don't make me laugh
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Bank-beating exchange rates on your international payments
- 1 The black and blue dress: Makers considering a white and gold version
- 2 Husband and wife die holding hands within hours of each other after 67 years of marriage
- 3 What color is The Dress, white and gold or blue and black? An eyewitness gives a definitive answer
- 4 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
- 5 Fearne Cotton quits Radio 1 after ten years for 'family and new adventures'
New theory could prove how life began and disprove God
Half of Ukip voters say they are prejudiced against people of other races
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
This is what it's like to be dead, according to a guy who died for a bit
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Aqsa Mahmood branded a 'disgrace' by her parents after claims she recruited three UK girls flying to Middle East
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads