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State Pension Top-up: Should I consider it?


This government scheme opened on 12th October 2015 and ends on 5th April 2017 allows individuals who are already receiving the state pension, and those who will reach state pension age before 6th April 2016, to buy extra income of between £1 and £25 a week. The cost depends on how much you buy and decreases with age.

This is an opportunity to increase retirement income which will be index-linked for life, with at least half of this extra state pension continuing to a spouse or civil partner for their lifetime.

How does it work?

The state pension you receive is based on your national insurance (NI) record. Many people were angry to discover that, although they had a full 30 years of contributions, they would still miss the more generous flat-rate pension of approximately £151 per week being introduced on 6th April 2016.

The government has moved to put this right by offering the opportunity to back-fill your record with the purchase of ‘Class 3A’ stamps. These are added to your ‘state second pension’ (S2P) and paid on top of the basic state pension.

How much does it cost?

So for example a 75 year old looking to purchase an additional £25 per week, they would need to make a single payment of £16,850. Assuming the £25 additional payment increased at a constant inflation rate of 2% per year and the recipient pays basic rate tax on these payments they would start to see a return on their investment after 15 years. Should they live for 20 years they will receive a return of £8,419 after basic rate tax.

To work out how much extra state pension would cost you, you can use the government’s top-up calculator - https://www.gov.uk/state-pension-topup.

Is it worth it?

If you require additional index-linked income from your capital and live long enough to recoup the money you spend, then the initial layout is worth it for certain individuals.

The average life expectancy of the UK population:

The scheme currently offers a far better rate compared with the return on a standard index-linked annuity purchased with a private pension fund, partly because you are not having to pay towards the insurance company’s costs.

‘The scheme will be attractive to those on low earnings’ and those unable to build up an entitlement to the additional state pension including the self-employed.

The price is the same for men and women and as on average women tend to live longer it makes the scheme more attractive for females.

Any drawbacks?

The top-up is taxable, so ‘lower rate taxpayers will see a greater gain’ than higher rate and additional rate taxpayers.

The scheme might not be suitable for those on benefits, living abroad or in poor health or with lower life expectancy. The scheme might not be as tempting for a single person, because the provision for a surviving partner’s pension when they die is not required.

If you do not have a full 30-year NI record (which many women do not) it is probably best to top up via the standard ‘Class 3’ contributions that will ensure you have a full basic state pension. The Class 3 top-up scheme is more generous than the Class 3A scheme. If you are self-employed without a full record then you will have to make Class 2 contributions.

The content of this article should not be taken as advice as your own circumstances may be different. All calculations and rates are accurate as at October 2015 and subject to change. Please contact us to arrange a meeting regarding your own personal financial affairs.

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