Retirement: Should you top up your State Pension?

Posted on October 12th, 2015 | Categories - Retirement

Everything you need to know about deferring your State PensionFrom this week around seven million people have a unique opportunity to top up their State Pension and increase their retirement income for the rest of their life.

What’s changing? Do you qualify? Should you take advantage of this opportunity?

Read on and we will answer all of these questions and more.

What’s changing?

From next April the Government will introduce the flat rate State Pension, which for those who qualify will start at around £155 per week.

However, anyone who has reached their State Retirement Age (SRA) before next April will not qualify for the new flat rate.

Therefore, to soften the blow, the Government is giving some seven million people the chance to top up their State Pension by a maximum of £25 per week.

Do you qualify?

That all depends on how old you are.

Anyone who reaches their State Pension Age before 6th April 2016 will qualify. That means men who were born before 6th April 1951 and for women, 6th April 1953, will qualify.

Should you take advantage of this opportunity?

The scheme, known as Class 3A National Insurance contributions, is essentially very simple: in return for a lump sum, people who qualify can top up their State Pension by up to £25 per week.

Each year the additional State Pension purchased will rise in line with the Consumer Prices Index (CPI).

Furthermore widows and widowers will be entitled to ‘inherit’ between 50% and 100% of the top up, dependent on certain criteria.

The amount you need to pay to boost your State Pension depends on your age; the younger you are the more you will pay and vice versa.

Take for example someone who is 66 and would like to top up their State Pension by the maximum of £25 per week. This would require a lump sum payment of £21,775; an effective return of 5.97% per year, before any tax due is deducted.

The ‘return’ is significantly above the best buy savings account currently available. Although care should be taken; the State Pension top ups mean you will give up access to your capital forever, which is not the case with a savings account.

You can find out exactly how much it would cost to top up your State Pension by clicking here and using the Government’s calculator.

People who want to top up their State Pension will have 18 months to do so. But there’s no rush, unlike some other recent Government schemes, such as Pensioner Bonds, the window won’t close early, which gives you time to consider carefully whether or not this is right for you.

Topping up your State Pension might be right for you if:

  • If you believe the income you will receive from the State Pension top up is better than you can achieve by investing or saving the money elsewhere
  • If you have a lump sum of money you no longer need access too
  • If you can be certain that you won’t need access to the lump sum you have given up in return for the higher State Pension
  • If your, or your spouse’s, state of health is good and you have reason to believe you will live long enough to receive more back in income than the lump sum you have paid out

It might be wrong for you if:

  • If you do not have a complete National Insurance record, often the case with self-employed people and / or women, you may be better topping up your State Pension through Class 3 National Insurance contributions and not the new Class 3A option
  • If you claim means tested benefits, which could be cut if your State Pension increases
  • If you and your spouse are in poor health and your life expectancy is such that you are unlikely to receive more back in income than the lump sum you have given up
  • If you don’t have a lump sum of money you can afford to give up and never be able to access again

We’re here to help

If you would like to know more about the new State Pension top ups, and whether they are right for you, we are here to help.

Call Bev or Sarah today on 0115 933 8433 or email info@investmentsense.co.uk

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