Should you be considering topping up your state pension?

Should you be considering topping up your state pension?

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.

For more information about Capital Asset Management, visit our website or to seek more advice on this subject, call us on 020 7398 6600 or email sophie@capital.co.uk.

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