Top up your pension income

Autumn 2013Pensioners who will miss out when the new state pension is introduced have just been given the chance to top up their pension entitlement by up to £25 a week.

Although the return on offer appears to be three times the rate currently available from a typical savings account, the top up decision is not straightforward. The scheme will be of particular interest to women and the self-employed who may have little, or no, additional state pension entitlement.

Do you qualify? Those who reach state pension age before the new state pension is introduced from 6 April 2016 will qualify - so men qualify if they were born before 6 April 1951 and women qualify if they were born before 6 April 1953.

How and by when? You need to make a one-off lump sum class 3A voluntary national insurance contribution by 5 April 2017, and you can apply online or over the phone.

How much does it cost? This depends on your age when you make the payment. Rates are gender neutral. For example, the full £25 a week - £1,300 a year - costs £22,250 for a 65 year old, but only £16,850 for someone ten years older. It may therefore make sense to wait until your next birthday.

What about other voluntary contributions? If you are able to make class 3 NICs to fill a gap in your contribution record, then this is likely to be more beneficial.

Can you get access to the funds? Once you have made the payment you will no longer have access to the capital you invested.

Is it inheritable? In most cases a surviving spouse or civil partner will inherit between 50% and 100% (depending on your date of birth) of the pension following your death. Children or other people cannot inherit the benefit

Other advantages and disadvantages? The top-up pension is inflation proofed (although not quite to the extent of the normal state pension) and it is guaranteed for life. However, it is taxable and so not such a good deal if you are taxed at higher rates. The additional income could also impact on income-related benefits.

Is it a good deal? Ignoring tax and inflation proofing, a 65 year-old needs to live for 17 years to recover the contribution, and a few years more if tax is taken into account. So it's probably a good deal if you are in good health, not paying tax at higher rates and have a younger spouse or civil partner who will inherit when you die. It is not quite so good for single people, although women gain from a longer life expectancy.

Good advice is essential so please get in touch with us to discuss your options.