Should you top up your State pension?

October 12th, 2015 by

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Dan Woodruff

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.
Dan Woodruff

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Should you top up your state pension?

Should you top up your State pension if you are due to take benefits before April 2016?

The State pension is changing from April 2016. As a result of this change you will be offered the chance to top up your State pension if you already receive the State pension under the current rules, or will become entitled to get the State pension before April 2016, . This article examines whether you should top up your State pension.

Key Points:

  • You can top up your State pension if you start receiving it before April 2016
  • You have until April 2017 to decide
  • You can buy additional income of up to £1,300 per year
  • The additional income available is very good value for money

The State pension is changing

From April 2016 the UK State pension is changing from a 2 tier system to a flat rate State pension. Essentially, if you get the State pension before this date you will do so under the old rules. You will have a Basic State pension based on your National Insurance contributions, plus a top-up SERPs/S2P pension based on your earnings. After this date you will receive a single State pension based on National Insurance contributions, but starting at a greater rate. The new State pension will be more generous for many people.

The Government is offering everyone who currently gets to ‘old’ State pension the chance to top up your existing benefits. This is known as Class 3A National Insurance Contributions.

What is the offer?

You can buy between £1 to £25 per week (£52 to £1,300 per year) in additional income, which will increase each year in line with the Consumer Prices Index (CPI). If you die your spouse will be able to inherit half of the additional income, if they survive you.

The cost will depend on the amount of income you buy, and is based on your age. Click here to view the Government’s calculator. There is no limit to the funds available for this offer, so you do not need to get your application in immediately.

What do you get?

The additional income is very much like buying a pension annuity. The income will be guaranteed for life, but will be lost on death (unless your spouse gets a reduced pension). Therefore, this offer will be attractive to you if you want a secure, inflation-proofed income. The top-up will be useful for those who do not have a full National Insurance contribution record, like people who took a career break, or the self-employed.

It will be less attractive to you if you like the idea of being able to access the capital, or want to invest the money.

Is it good value?

This seems like extremely good value for money.

For example, if you are aged 65, the full £1,300 additional income will cost you £22,250. To buy an equivalent pension annuity giving the same income would cost £44,500. This assumes you have no health issues.

Sources: UK Government and Assureweb 12/10/2015.

Are there any alternatives?

If you do not get the full State pension under the current rules you should consider using ‘normal’ Class 3 National Insurance contributions to top this up. This route may be better value for money.

You can also consider postponing your State pension if you do not currently need the income. This will increase the future value of your income.

You can also buy lifetime annuity products, although these are unlikely to be as good value.

What should you do next?

Decide how much income you want to buy and check out the cost using the calculator.

We recommend that you examine your State pension in conjunction with your other income sources, and alongside your expenses. If you are approaching retirement, many of these decisions are important and cannot be changed at a later date. Contact us to discuss your retirement income in more detail and make sure you take the right decisions for you.

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