State pensioners can now top-up
Last December, the Chancellor announced a new scheme to allow those people who will not benefit from the increased flat rate amount of state pension, set at around £155 a week, to pay some cash now, to get an improved pension. A new microsite has now been launched at www.gov.uk/state-pension-topup which includes a calculator to see just how much an extra £1 of state pension will cost you.
Under the scheme, eligible pensioners already in receipt of a state pension, or those retiring within two years can purchase up to an extra £25 a week of extra state pension, which would life the full “basic” state pension of £110.15 a week to £135.15 a week. Although this is still short of the new flat-rate amount. All amounts will increase with inflation.
The cost of the extra cash will vary depending on a person’s age. For example, for a 65-year-old, each additional £1 a week will cost £890, the Department for Work & Pensions said. The maximum £25 addition will cost £22,250.
However, there will only be a short window for pensioners to take advantage of the offer, running for 18 months from October 2015. The Government will allow the top-ups to be inherited by a surviving spouse or civil partner, who will be entitled to at least a 50% survivor pension.
But is it worth it? Ignoring the spouse benefit for a moment, the figures suggest you would have to live for just over 17 years from the date of retirement (or top-up if later) in order to get your money back in absolute terms. Given rising life expectancies, making it to 82 is perhaps not as high a mountain as it might previously have been, but there’s still no guarantee.
However, figures from broker Hargreaves Lansdown suggest that the Government might actually be offering a good deal. The cost is generous compared with the rates on equivalent annuities, where an inflation-linked £52 a year would cost nearly £1,500.
Additionally, state pension income is taxable (although someone receiving only the state pension would not have income exceeding the personal allowance), so if pensioners do have other income that meant any top-up would be taxable, they might consider investing the cash in an ISA instead, where amounts can be drawn free of tax. Although you might outlive your ISA pot.
People who think they might be interested can register their interest at gov.uk/state-pension-topup or call 0845 600 4270 or 0345 600 4270.