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Will you top-up your pension?

Will you top-up your pension?

Category: Pensions

Updated: 09/10/2015
First Published: 09/10/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Monday (12 October) heralds the day when pensioners and those reaching retirement age before the 6 April 2016 will be given the opportunity to 'buy' a top-up for their pension. According to the Department of Work and Pensions, around 265,000 people are likely to take up the scheme – will you be one of them?

Class 3A

The scheme is known as 'Class 3A National Insurance contributions', and it fundamentally gives retirees the chance to increase their state pension by up to £25 per week. This would push their weekly entitlement above the current limit of £115.95 and potentially give them an extra £1,300 a year more in annual income.

To obtain this tempting top-up, pensioners will buy the income with a one-off lump sum, the cost of which will depend on the age of the buyer – the younger you are, the more expensive it will be. For example, a 65-year-old buying the maximum £25 a week top-up will spend £22,250 to give their pension a boost, while a 75-year-old will spend a smaller sum of £16,850.

According to calculations by Hargreaves Lansdown Pensions, this cost compares favourably with that of annuities, which are the only other pension product to provide a guaranteed income for life: for instance, a 65-year-old buying a standard annuity to give the same annual income of £1,300 per year will need to spend £35,215 - £12,965 more than the equivalent state pension top-up. Furthermore, 50% of the state pension can be passed onto a spouse when the recipient dies – an option that, if included on an annuity, would increase its cost even more.

The scheme will be on offer to those who reach state retirement age before the 6 April 2016, which is when the New State Pension launches, and is designed to give eligible retirees the chance to enjoy similar benefits to those who will receive the new flat rate.

Commenting on the scheme, Tom McPhail, head of Retirement Policy at Hargreaves Lansdown Pensions, said: "No private pension company can offer such an attractive deal; so if you are eligible and you want to buy yourself some inflation-linked guaranteed income for life, with death benefits for your spouse thrown in too, then this is the scheme for you."

Get the pension you want

Securing the best returns for your retirement is key for a comfortable post-work life. As well as the Class 3A scheme, you may also want to think about the Class 3 NICs scheme, which allows those with gaps in their National Insurance contributions to fill in the missing years.

Topping up your state pension is not the only way to secure an income, however. Contributing to your workplace scheme should also form the base of your pension savings, particularly as your employer will make contributions into your pension, too. If auto-enrolment still hasn't reached you, get ahead of the curve and join your scheme now. Saving early on will help you to generate a sizeable pot.

Other savings vehicles, such as ISAs, can also be a great way to build up a retirement nest egg. A cash ISA is a great addition to a savings portfolio, while those who are happy to take on some extra risk may want to look into stocks & shares ISAs.

Whatever you do, when the time comes make sure you get all the advice you need. Pension Wise is a great place to start, after which a chat to an independent financial adviser can help you to make concrete plans so you get the comfortable retirement you deserve.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.