Scottish Daily Mail

How a new state pension top-up could TREBLE your income

- By Sylvia Morris

A NEW Government scheme could see women and the self- employed treble their income from savings by buying a state pension top-up instead, Money Mail can reveal.

In just a few weeks, the Department of Work and Pensions will launch a plan allowing those who are in or approachin­g retirement to swap a chunk of their savings for a boost to their state pension.

From October 12, those eligible will be able to buy a special top-up called a Class 3A voluntary national insurance contributi­on. Pay just less than a £10,000 lump sum and you’ll get an extra £11 a week on your state payout — or £572 a year before tax.

This is more than treble the £180 a year before tax a 65-year-old would earn on the same sum in an average savings bond paying 1.8 pc.

The maximum top-up on offer is £25 extra a week — worth £1,300 a year. This would cost a 65-year-old £22,250, so they’d need to live to at least 81 to make it worthwhile. In the average savings bond, this sum would pay just £400 — less than a third.

Two other benefits are also included: the payout is inflation-proofed, so will rise in line with the consumer price index; and for married couples, the surviving partner receives at least half of the additional pension.

The scheme is part of an overhaul of the state pension that began nearly two years ago. This has seen a rising state pension age for men and women to qualify, and a new flat rate of £155 a week.

This will be paid only to people reaching state pension age after April 6 next year. Those retiring before this date will have their payout worked out under the old two-tier system.

This is a mix of contributi­ons towards a basic pension — currently £115.95 a week — plus any additional state pension built up ( commonly known as Serps or state second pension).

The pension overhaul has hit many thousands of women in their early 60s who feel cheated by the Government. By a quirk of birth, they’ve missed out on the new higher state pension, which someone born just a few months later would have received.

To try to address this, the new top-up scheme to be introduced in October will offer those set to miss out on the new higher flat-rate pension a chance to boost their own smaller state payout.

It will run for 18 months and is open to women born before April 6, 1953, and men born before April 6, 1951 — everyone who has reached state pension age before April 6 next year.

The Government estimates 265,000 will take up the offer. But the biggest beneficiar­ies will be women and the self-employed.

This is because, until now, many have not been able to make any contributi­ons to build up years of additional state pension for a bigger payout when they retire; they’ve only been able to rely on the basic part of the state pension.

In particular, it includes thousands of older working women who have paid the married woman’s stamp — a reduced national insurance contributi­on, which saved them money.

They have been barred from topping up any additional state pension because, having agreed to rely i nstead on 60 pc of their husband’s state pension later in life, they were deemed to have forfeited any rights to the benefit.

Low earners and carers — predominan­tly women — who have simply not earned enough to build up much additional state pension are eligible for the offer.

The self-employed will benefit, too, as successive government­s have previously always excluded them from the state second pension.

Justin Modray, an independen­t financial adviser at Candid Money, says: ‘This deal could be good value if you are already receiving a state pension or will do so before April 6 next year. But remember, you will lose access to the savings capital for ever and the income is taxable if it exceeds your personal allowance.’

As well as beating payouts on savings bonds, it could be a better option than buying an annuity from a life assurance company.

Your £22,250 payment to buy Class 3A voluntary national insurance contributi­ons will get you £1,300 a year in extra pension. This works out as 5.84 pc a year.

But with an annuity, a 65-year-old non-smoker would receive £760 for the same money each year — a return of just 3.4 pc. Even for a smoker the amount would only rise to £920 a year — or 4.1 pc. The benefits of the new top-up scheme are even more generous if you’re older when you buy.

If you are 70, the rate of return effectivel­y rises to 6.67 pc because the older you are, based on an average lifespan, you won’t be deemed to benefit for as many years as a younger person.

Aged 70, to buy a full £25 extra a week you’d pay just £19,475.

However, experts warn that the deal won’t suit everyone. Tom McPhail, pension specialist at f i nancial advisers Hargreaves Lansdown, says: ‘The key to this is how long you live. If you’re single and in poor health, the chances are this would be a poor deal because you could die without reaping the benefits. But for those with good life expectanci­es, t hi s is a potentiall­y appealing way to boost retirement income.’

Figures from research charity Pensions Policy Institute (PPI) show a 65-year-old needs to live for another 16½ years to recover the cost of their Class 3A contributi­ons. Aged 75, they’d need to live for another 12½ years.

Currently, t he average life expectancy for women is 89.3 years and men 86.6 years.

Melissa Echalier, of PPI, says: ‘You have many more options on how to spend your pension savings since the arrival of the new pension flexibilit­y in April.

‘ It’s critical that i ndividuals understand the pros and cons before opting for this new state pension top-up.’

For example, it won’t suit retired couples who need access to a lump sum or who want to leave as much as possible to their children. And those on pension credit and other benefits need to do their sums.

Any additional state pension you buy will be added to your income when it comes to claiming pension credit as well as housing benefit and council tax support. Top-ups could mean you qualify f or less benefits.

If you take money out of your pension pot under new pension freedoms to buy the state top-up, you could f ace an extra tax bill, which would reduce your return from it.

A spokesman for the Department for Work and Pensions, which will be paying out the pension, says: ‘We are preparing an informatio­n pack that will be sent out later this year to those who have registered for the scheme.’

HM Revenue & Customs, which will be collecting the contributi­ons, says it will highlight the fact that separate Class 3 national insurance contributi­ons are potentiall­y better value to those eligible to make them.

These let you fill in any gaps in your basic state pension contributi­on record, so you qualify for a higher basic state pension.

However, the number of people who are eligible is considerab­ly smaller because many eventually manage to accrue enough years of national insurance contributi­ons to qualify.

To register your interest in Class 3A, statepensi­on.topup@dwp.gsi.gov.ukemail

or call 0345 600 4270.

sy.morris@dailymail.co.uk

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