This week marks a year until you can start topping up your state pension. You can pre-register now and, from next October, can make additional contributions that could add up to an extra £1,300 per year in your state pension, but will you take advantage of the opportunity?
The state pension top up is a Government initiative that was announced in last year's Autumn Statement. In essence, it's a scheme that allows pensioners to top up their additional state pension with a new class of voluntary national insurance contribution, known as Class 3A, which means they could get up to an extra £25 per week for life.
The scheme is open to all pensioners who reach state pension age before the introduction of the new state pension in April 2016 and is a one-off opportunity. It's been designed to protect an individual's state pension from inflation as it'll be index-linked, and it can also be inherited, with a surviving spouse or civil partner entitled to at least 50% of the deceased's additional state pension.
It's being touted as a way for existing pensioners to increase their pension ahead of the introduction of the new state pension in April 2016 – which brings together the basic and additional state pensions – and therefore offers a fairer alternative for those who don't make the cut-off point. It's said to be particularly beneficial for women and the self-employed, who often have low additional state pension entitlement.
Minister for Pensions Steve Webb said: "This is a real opportunity for people to increase retirement incomes from £1 to £25 a week. Many people won't have had the chance to build an Additional State Pension, such as women and the self-employed, and we have devised a way that will provide a fairer system. The increased income will be index-linked providing a fair deal for pensioners.
Those who are eligible can pre-register now, and from 12 October 2015 until 5 April 2017 they can make additional contributions as a lump sum payment that will increase the value of their state pension.
You can choose to top up your pension by between £1 and £25 per week, but how much you'll need to contribute to achieve that depends on how much extra pension you want and how old you are when you make the contribution.
For example, a 65-year-old who wanted to increase their state pension by £1 per week would need to make a lump sum contribution of £890. If they wanted an extra £5 per week (£260 per year) this figure would rise to £4,450, or if they wanted the maximum £25 extra per week (£1,300 per year), they'd need to make a contribution of £22,250. The extra contribution required reduces with age, so a 75-year-old (for example) seeking the same additional income would need to make contributions of £674, £3,370 and £16,785 respectively.
There's an online calculator available that can work out the contributions you'd need to make based on your specific circumstances. People can also pre-register their interest online, or can call 0345 600 4270 to get the process started.
So, will you be looking to take advantage of the new top up allowance? The chance to secure an extra £1,300 in income per year, for life, could well be too good an opportunity to pass up, and many people with the necessary funds to make that kind of contribution could be tempted.
However, this is just the latest change in a stream of reforms set to grace the pensions landscape, and the new freedoms that will, in effect, give you more control over your hard-earned pension savings could make you think a little deeper about the subject.
Deciding whether to top up your pension or put the extra funds into an alternative income solution will be a wholly personal decision, and will depend entirely on your individual circumstances. While the option to "buy" extra state pension could prove to be great value for some, those with health conditions, higher-rate taxpayers or pensioners needing a lump sum for other means could well find it costly. Plus, if you've fallen short on your entitlement for basic state pension, it's wise to top up these national insurance contributions first.
However, for many people, the pension top up could prove to be great value and can offer a kind of security that other investments may not be able to. Just make sure to consider your options thoroughly – ideally by talking to a professional – and you can be sure you've got the retirement income solution that works for you.
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