Why dive in to top up a pension? Just be slow on the draw For almost everybody, it’s going to be better to defer than top up
From Monday, hundreds of thousands of people can buy themselves a better state entitlement. But there are other options, writes
More than 250,000 people who have reached state pension age by April 6 2016 are expected to sign up to a special “state pension topup” scheme being offered by the Government from this Monday. They will be able to increase their weekly pension by up to £25 a week and the sum will be index-linked.
Even so, however, many of these people would be far better off going down a different route.
The scheme allows men born before 6 April 1951 (now 64 or older) and women born before the same day in 1953 (now 62 or older) to pay up to £23,900 as a lump sum for their extra entitlement.
The exact amount will go down with age – as the Government can expect to pay out for a shorter period with older people.
The pensions minister Baroness Altmann calls it a “ground-breaking scheme” because it has been set up as a one-off arrangement to improve the position of some people who are too old to benefit from the single-tier pension that starts next year.
Baroness Altmann said: “This scheme could be particularly attractive for those who haven’t had the chance to build additional state pension money, such as some women and self-employed people. But, of course, people should take advice to ensure that they will benefit.”
There is an alternative – deferring taking the state pension – that would achieve much the same result but cost up to 59 per cent less for higher-rate taxpayers, 45 per cent less for standardrate payers and nearly 30 per cent less for non-taxpayers.
So, according to calculations that have been checked by the actuary Mercer, a 65year-old standard rate taxpayer could achieve an extra £25 a week by deferring the state pension for two years – at a post-tax cost of around £12,400. That is around 45 per cent less than the price of the top-up (which is £22,250 for someone of that age).
The calculations assume that the individual draws a sum equal to the state pension from their savings (the money theywould otherwise have invested in the top-up scheme) for just over two years. (Deferral is not, however, an option for people on certain benefits, including pension credit and incapacity benefit.)
The calculations were carried out by reader Stephen Kenny, a retiree from the energy sector who has a mathematical bent. His fig- ures suggest that a deferral of 25 months is enough to equal the top-up. The period is short because deferral rates are very generous for people in this age group – giving an extra 10.4 per cent of pension for each year deferred. (The rates are so generous that they are being cut to 5.8 per cent for people younger than those in this age group.)
Mr Kenny thinks that the current deferral option is “incredibly good value” and said: “For almost everybody, it’s going to be better to defer than to buy the top-up.”
Deborah Cooper at Mer- cer, however, said that both routes are valid. She described the top-up as “a safe, simple and good-value option”, and deferral as “a possibly marginally less safe but better-value alternative”.
She sees deferral as slightly “less safe” because the individual has to manage their own money, keeping it safely invested for two years.
There is yet another option – paying voluntary national insurance contributions – for those who are not on course for the full state pension because they have gaps in their national insurance record. For some people this will be very worth while – while for others it could be a waste of money.
You need to contact the Department for Work and Pensions (see links below) to look at your contributions history before you can work out if you would benefit.