Topping-up your State Pension : April 2014 update

car fuel guage referring to the fuel in your state pension

Pensions

Julie Hutchison

25th April 2014 at 9:42am

On 2 April 2014, the government announced more detail about how people could boost their State Pension. It’s targeted at people who already receive the State Pension, or who will start to receive it, before the new flat-rate State Pension is introduced in April 2016. It’s welcome news for those in retirement looking for ways to boost their income, although as someone in her thirties, I do wonder what shape the State Pension will be in by the time I get round to qualifying for it (if I even will).

The top-up scheme

The recent announcement provides more information about a ‘top-up’ scheme. This enables people to pay voluntary Class 3A National Insurance contributions (NICs) during a transition period, in return for a better State Pension.

If you make a top-up NIC payment as part of this scheme, you can increase your State Pension by up to £25 a week. If you make a top-up NIC payment as part of this scheme, you can increase your State Pension by up to £25 a week.

The government estimates that around 265,000 people could make use of the top-up scheme. It’s expected that some women, and those who have been self-employed, could make particular use of it, as they may not be receiving the full State Pension due to lower NIC contributions in earlier years.  Government sources say that women have an average weekly State Pension of £109 compared to £141 for men, and this top-up scheme provides an opportunity to address that imbalance.

Does the top-up offer value for money?

The top-up scheme won’t be so attractive to people with short life expectancy, as they won’t benefit from the long term inflation-proofing built into the State Pension. And if you’re single, divorced or widowed, the spouse’s pension benefit is not a relevant feature, although the numbers might still mean the top-up is worthwhile for you. Let’s look at an example.

Case study : 68 year old, annuity v State Pension top-up

For a 68 year old in normal health, a lump-sum of £20,675 would boost State Pension by £25 a week.  The rates are generally the same for men and women. For a 68 year old in normal health, a lump-sum of £20,675 would boost State Pension by £25 a week. The rates are generally the same for men and women.

The equivalent annuity income could cost around £38,000, with the index-linking and spouse’s pension benefits*.

In this situation, the opportunity to make a State Pension top-up looks attractive, but there are other considerations. For example, by ‘purchasing’ that extra income, you may be spending capital, which may affect the value of your estate which your loved ones inherit. Income tax is also a factor: you could pay income tax on your State Pension, depending on your overall income position. But the capital you use to pay for that top-up might come from a tax-efficient source eg. an ISA, where there isn’t tax due on income.

There’s a range of things to weigh up, and it’s best to speak to an expert to get guidance on your own situation.

Top-up scheme ‘window’ for action

The scheme is due to open in October 2015 and is expected to run until April 2017. It will be available to people who reach State Pension age before the introduction of the new State Pension in April 2016.

Online calculator to help to work out your top-up payment

If you’re interested in finding out more information about the top-up payment you could make, this table summarises the lump sum required for each extra £1 of weekly State Pension. Prices for people age 65 to 100 are shown, as well as for women aged 63 and 64.

And this online calculator helps you to identify the figure which is relevant for you.

What action to take?

There’s a government helpline on 0845 600 4270.  And you can register for updates about the top-up scheme by emailing paid.caxtonhouse@dwp.gsi.gov.uk

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The information in this blog or any response to comments should not be regarded as financial advice. Please speak to an expert to get guidance on your own situation.

* Based on annuity quotes sourced on 3 April 2014