Half of million people are missing out…
How would you feel if you could get a great return of about 7% on your investment, as income for life, guaranteed and inflation-proof (CPI), and backed by the Treasury? Pretty good?
You must hurry though; the opportunity ends on 5 April 2017.
What is being offered?
You can top up your State Pension if you are a man born before 6 April 1951 or a woman born before 6 April 1953, as long as you’re entitled to receive a basic state pension or additional state pension before 6 April 2016. This is done by paying Class 3A voluntary NIC contributions.
You can buy up to £25 extra per week (£1,300 a year), with the cost depending on how old you are now. For instance, to get the full £25 weekly top-up will cost you £22,250 if you buy it at age 65. However, if you buy it aged 75, it will cost you only £16,850. You can use this government calculator to see what might be right for you, it takes just three simple steps.
Is it worth it?
At first glance, £22,250 for £25 extra per week might not look very exciting. This is perhaps one reason why there has been such a low uptake (latest figures suggest fewer than 2% of those eligible). However, when you take a harder look at the figures, this deal represents better long-term value (for most people) than almost anything comparable on the market.
For a 65-year-old topping up their state pension, every £1 of additional weekly income costs a one-off payment of £890. That’s equivalent to an annuity rate of 5.84% – more than double the rate you would currently achieve from an index-linked joint-life annuity on the private market. For a 75-year-old this effective rate rises to 7.2% – quite unachievable for anyone without a very good guaranteed annuity rate.
To put it another way, if you were to pay that £22,250 at age 65 to receive your extra £25 a week, then by the time you turn 82 you will have received more money than you paid in. And if you live to be 90, you will have received an additional £10,400 on top of what you paid. Finally, if you happen to pass the 100-year-old mark (as many more people are now doing) then you would have more than doubled your initial investment.
How do I find out if it makes financial sense for me?
Go to this website and complete a few steps.
Consider the example of Trevor and Janet: Trevor is 70 and Janet is 67. Trevor buys the full £25 per week for £19,475. Trevor’s average life expectancy is to age 87, another 17 years, and with a 1 in 4 chance of reaching age 94 and a 6% chance of reaching 100. Janet buys the full £25 per week and it costs her £21,175. Janet’s life expectancy is another 22 years to age 89 and a 10.7% chance of reaching 100.
This is close to the simple arithmetic of dividing the purchase sum by £1,300. There are many factors that can affect your life expectancy and the ONS data includes everybody.
What happens to the money if I die?
Your spouse or civil partner can now inherit the state pension and this top-up. Between 50% and 100%. Click here for more information.
What else could I do instead of the top up?
You could invest a similar amount into a tax-free ISA, but it is very unlikely the income would be as high as the state pension top-up yield.
You could invest into a CPI-linked annuity, but based on current rates, the terms are likely to be lower.
You could simply keep your capital on deposit in cash and withdraw £108.33 each month (£25 x 52 weeks divided by 12) until it runs out.
Who is it suitable for?
Those without a full NIC record, such as women with career breaks, and the self-employed. Beware the tipping point of the 40% tax rate if you are near the threshold. The Institute of Fiscal Studies (IFS) has calculated that it would cost double what the government is for to fund an extra £1,300 a year through an annuity. However, if you do not have a full 30-year record (which many women don’t) it is probably best to top up via the standard Class 3 contributions that will ensure you have a full basic state pension.
If you are self-employed without a full record, then you should make Class 2 contributions.
The Class 3 top-up scheme is more generous than the Class 3A scheme. It costs just £733.20 to buy an additional year of state pension worth £3.86 a week or £200 a year.
Because the take-up has been low and many of those eligible have missed or overlooked the message, do your friends and family a big favour and forward this message on to them.