As of today – Monday, 12 October 2015 – millions of people have the chance to boost their future retirement income by up to £25 a week through the Government's top-up scheme. But just what is the scheme, is it worthwhile, and will you be taking advantage? Here's a quick run-through of everything you need to know to help you make your decision.
The top-up scheme – officially known as Class 3A – allows existing pensioners and those who will reach state retirement age before 6 April 2016 to enhance their future income by making an upfront lump sum payment. The scheme has been designed to allow those who will miss out on the more generous single tier state pension (set to be introduced in April next year) to benefit from an increased payment from the state, and it has the potential to make a significant difference.
The new state pension is expected to pay around £155 a week to those who qualify for the full amount, but the basic state pension – which will continue to be paid to existing retirees after the new regime comes in – currently pays a maximum benefit of just £115.95 a week. The top-up scheme has been brought in to help redress the balance, and ensure that those who would otherwise miss out on a higher income get the chance to boost their payments: "It could be particularly attractive for those who haven't had the chance to build significant amounts of state pension, particularly many women and people who have been self-employed," said Pensions Minister Baroness Altmann.
All existing pensioners and those who will reach state pension age before the new regime kicks in – so essentially, men aged 65+ (born before 6 April 1951) and women aged 63+ (born before 6 April 1953) – will be eligible to take part in the scheme, so long as they're already eligible to receive the UK state pension.
From now until 5 April 2017, all eligible individuals will have the option to make newly-introduced Class 3A National Insurance lump sum contributions in return for inflation-proofed additional state pension. Once the lump sum has been paid, the extra pension will be received for the rest of the individual's lifetime, and it'll be inflation-linked (it'll increase in line with the measure of CPI each year, so will essentially keep up with the cost of living) and may be inherited by their spouse or civil partner.
The cost of the top-up will be based on age and will take average life expectancy into account, but it'll also depend on how much extra income you want to receive. You don't have to opt for the £25 per week maximum – doing so could require a significant investment – but instead, you have the option to purchase a top-up of £1 to £25 per week.
It'll cost you less to secure a lower additional payment, and the cost goes down with age, too. As an example given by the Government, a 68-year-old who wants an extra £5 a week (or £260 a year) from his state pension will need to pay £4,135 upfront, while securing an extra £1 per week will cost just £827. At the other end of the scale, a 65-year-old who wants to secure the maximum £25 a week (an extra £1,300 a year) will have to pay a £22,250 lump sum, while the cost for a 75-year-old will be £16,850.
Richard Eagling, head of pensions at Moneyfacts, said that when compared with the income that similar lump sums could secure through an annuity, the top-up scheme represented "an extremely attractive deal", so many people will understandably be tempted to take the plunge. Some may even opt to use some of the cash they can free up from their personal or workplace pension to buy the top-up instead of an annuity, but as ever, there are plenty of things to think about.
First of all, you'll need to actually have the available cash to make the upfront payment required, which means that some people may not be able to boost their income by as much as they'd want. It's also important to establish whether the higher pension income will impact any means-tested benefits (such as pension credits), and the scheme may also be unsuitable for those who have a lower life expectancy through poor health.
It won't be right for everybody, and the Department for Work and Pensions therefore estimates that only around 265,000 people will take up the offer, out of some 7 million eligible pensioners. However, those who are eligible, who have the cash and are in good health could well find that they're able to benefit from higher pension payments for the long term.
Thinking of getting involved? Then make sure to get suitable advice. There's no rush – you've got 18 months until the scheme closes, which could give you time to build up a suitable savings pot – so if you want to find out more or see how much of a lump sum you'll need, check out the Government's State Pension top-up calculator to get started.
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