Tuesday, June 14, 2016
State Pension top up
Is it worth it?
The State Pension has just undergone a radical shakeup. Those retiring from 6th April this year will get the new State Pension. Those who retired under the ‘old system’ – who receive the basic State Pension – can apply for State Pension top up until 5th April 2017.
This is a way to increase your State Pension. You can get between £1 and £25 extra a week in exchange for a lump sum payment. It’s like an annuity: a guaranteed, inflation-proof income. It’s payable for life, and some of it can be inherited.
So is it worth it? We’ve run the numbers, and for most people the answer is no. This is because it takes a long time to get your money back. A 65 year old would have to pay £890 to receive an extra £1 a week. A basic rate taxpayer would be 82 before they got their money back, and a higher rate taxpayer 86. It’s possible to get a better return by investing the money instead.
Are there any other options?
It’s also possible to pay voluntary National Insurance contributions to boost your State Pension if you have gaps in your record. This is a great deal. The current Class 3 voluntary rate is £14.10 a week, or £733.20 a year. For each additional qualifying year your State Pension goes up by £4.45 a week, or £231.40 a year.
If you’re close to State Pension age you could get your money back in just a few years.
There are time limits for the gaps that can be filled and different contribution rates depending on when you were born. The deadlines for gaps between 2006 and 2016 have been extended to 2023.
For our clients, we’ll consider this at your next review.