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Should you top up your state pension?


1st Jan 2015 Pensions & Retirement

Should you top up your state pension?
Millions of older savers have been handed a unique opportunity to top up their State pension. Should they snap it up? For a one-off payment many people can now buy a guaranteed State pension top-up worth up to £25 a week. More than 250,000 people are expected to sign up but be warned, it won't be right for everybody.

Who qualifies for state pension top up?

The top up offer was launched in October and runs for just 18 months, until 5 April 2017.
It is open to people who have already reached state retirement age or will do so before 5 April next year. In practice, this means men born before 6 April 1951 and women born before 6 April 1953.
These people are locked out from the new flat-rate State pension, which comes into force from 6 April next year.
The top-up will buy you a guaranteed income that lasts for as long you live. It will rise in line with inflation and pay death benefits to a spouse or surviving partner.

What does it cost?

The maximum basic state pension is currently £115.95 a week, but the scheme allows you to buy between £1 and £25 a week extra by making Class 3A National Insurance contributions.
How much this costs depends on your age. At 65, you pay £890 for each £1 of weekly income. You would have to put down £22,250 to get the maximum £1,300 a year income.
The older you are, the less you pay, as your life expectancy is shorter. Buying income of £25 a week would cost £19,475 at age 70, then £16,850 at age 75 and £13,600 at 80.

Is it worth it?

The top-up is far more generous than if you were buying an annuity in the private sector.
A 65-year-old wanting £25 a week inflation-linked income for life would typically pay £35,215 on the open market. That costs £12,965 more than the State top-up, according to figures from the Hargreaves Lansdown annuity service.
Those with serious illnesses can get more income from an 'enhanced' annuity, because their life expectancy is shorter, but this would typically cost £30,751, which is £8,501 more.
The top-up also offers a better return than leaving money in a standard savings account.
Hargreaves Lansdown calculates that if someone age 65 left £22,250 in cash and withdrew £1,300 a year, their account would run dry at age 82, below typical life expectancy.
So in that respect, the top-up is a good deal.

What's the catch?

The income is guaranteed for life and that means the longer you live, the better the deal it is. People in good health, women (who typically live longer) and couples (who get death benefits) are likely to fare best.
The income may be subject to tax, which means the scheme is more attractive to basic rate or non-taxpayers.
There is another way to top up your state pension, however, and this may be better value.
If you aren't getting the full state pension because you have gaps in your contributions record, you can make up the shortfall with Class 3 National Insurance contributions.
You pay £733.20 for each additional year of State pension worth £200 a year, putting you in profit after around four years.
So before you sign up to the Class 3A additional pension top-up scheme, make sure you plug any gaps in your standard record first.
If you need expert advice or help and support with your pension and retirement planning from a trustworthy source, contact Unbiased today.
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