The State Pension top-up scheme offers a valuable opportunity to boost retirement income. But it may not be suitable for everyone.
Between 12th October 2015 and 5th April 2017, millions of people have the opportunity to top up their State Pension with a lump sum, and receive up to £25 more in State Pension income per week when they retire. This is designed to compensate those who won’t be eligible for the more generous flat-rate State Pension, which is coming into effect in April 2016.
To benefit from ‘Class 3A voluntary contribution’, you must be a man born before 6th April 1951 or a woman born before 6th April 1953. In addition, you must be entitled to the basic State Pension or Additional State Pension before 6th April 2016.
For those who are eligible, the amount you choose to contribute will be influenced by two key factors: how much extra pension you want to receive each week, and your age when you make the contribution.
The maximum you can receive is £25 a week or £1,300 a year, which is in addition to the current £115 weekly State Pension. The amount you need to contribute to receive this is variable. For example, if you are aged 65, you’ll need to pay a lump sum of £22,250, while those aged 80 must pay £13,600 due to their lower life expectancy. You can also pay a smaller lump sum to purchase less income. So the question many are asking is – is it worth it?
To top up or not to top up?
Looking at the positives first, the key benefit of the new top-up scheme is that it provides a guaranteed additional income for life. Those who live longer will gain the most from their contributions. However, spouses or civil partners will normally be able to inherit between 50-100% of this income. The payments will also be inflation linked and measured by the Consumer Prices Index (CPI), so their value will keep pace with the cost of living.
However, the new scheme is not without complexity and those who contribute may end up losing other benefits, which is why the Department for Work and Pensions recommends people seek financial advice.
Anyone without full National Insurance contribution records will probably benefit more from topping up through the Class 3 scheme instead, which is more generous but only applies to those without a full contribution record.
In addition, those receiving means-tested benefits may have their benefits reduced – particularly if they claim the guarantee element of council tax support, housing benefit or pension credit.
And people in poor health might not gain enough value from their investment and may be better buying an enhanced annuity instead.
How does it compare?
If you are aged 65 and take up the full state pension top-up, you’ll have to live at least 20 years from the date you start to receive your state pension in order to benefit. £1,300 per year for 20 years is £26,000. That’s £3,750 more than you will have put in, and that’s before you take the effects of inflation into account. Whether or not it’s the right option will depend on personal circumstances, so it’s important to do your research.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Pension rules apply and tax rules may change in future. If you need help with pensions, seek independent financial advice.