Pension top-ups could boost incomes by £25 per week

Pension pounds

Pensioners will be able to make 'top up' payments to boost their state pension by up to £25 a week, pensions minister Steve Webb has announced.

The new scheme is aimed at those already drawing a state pension or who will reach state pension age before the new flat rate state pension comes into effect in April 2016. It will allow them to pay in lump sums from as little as £900 to a maximum expected to be around £20,000 to £25,000.

The additional payments will translate into an increase in their weekly state pension of around £1 per £900 added (though the precise return will depend on the age of the retiree making the contribution).

The maximum contribution would amount to an extra £25 a week (or £1,300 a year), index-linked, for life. So someone living 22 years beyond pension age would gain an extra £28,600 of income over that period.

This is an interesting new idea, says Tom McPhail, head of pensions research at Hargreaves Lansdown: "In principle the terms offered by the government for these additional state pension deals look very attractive."

McPhail points out that if the money were used to boost a pension pot and buy an annuity instead, it would be markedly less advantageous. An inflation-linked single life annuity for a 65 year old currently costs £1,468 for each additional £1 a week of income, making the state pension "£900 per extra £1 a week [offer] a very generous" one, he says.

Find the best annuity rate for your circumstances


Current annuity rates have improved recently, rising a record 13% over 2013, according to the MGM Advantage Annuity Index.

However, this rise is from a historically low base, coming after several consecutive years of falls, including a 12% fall in 2012. The average conventional annuity rate now stands at around 5.8%, says MGM Advantage.

"The rise in rates has been driven by the market calming after the introduction of gender neutral rates, increased competition among open market providers and the better returns available on underlying investments," says MGM Advantage spokesperson Aston Goodey.

But he points out that rate rises tailed off towards the end of 2013 and "the prospect of further strong rises in annuity rates seems unlikely."

The government's state pension boosting initiative could therefore be all the more attractive to those approaching retirement. It will be available for 18 months from October next year.

This article was written for our sister website Money Observer

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So you put in £25,000 now and get £28,600 over 22 years. My maths says that that that is a gain of 14.4% spread over 22 years. And that means an average flat gain of 0.65% per annum and a compounded gain of even less. Not very good, especially as the annual increases will most probably be based on CPI which falls behind "real" inflation.

And remember that for many pensioners that £1300 will be taxed at 20%.
So the real income will be £1040.

So yet again, an article from Moneywise that has insufficient information.

And as for the statement that it is better than buying an annuity: this just shows how we are being ripped off by the annuity providers.

Forgive my limited knowledge on finance etc which is why I look on sites like this but in the article you state that  someone living over 22 years beyond pension  age would gain an extra £28,600 of income over that period, maybe I'm reading it wrong but it would only be an extra £3600 and if the £25000 was in an interest paying account or ISa for 22 years would it not actually make more than the extra £3600 anyway? As I say I really do value these snippets and I'm most likely missing something.

Ceymore. No you are not missing anything. Your maths is quite correct.

It's the same sort of problem that the insurance companies create by taking your money and then giving it back over 20 years or so and pocketing the growth.
And they hope that you will die sooner rather than later, so they can keep what's left.

Just look at annuity rates: a level annuity is currently paying a bit over 5%, and an inflation tracking one around 3%. Simple maths says that even if you don't invest it and keep it under your mattress 5% a year will last 20 years. Invest most of it in a variety of fixed savings accounts, keeping some back to spend each year and you will clearly win over any annuity unless you live to a very ripe old age.

I put some numbers into a spreadsheet and with 3%, just 3%, interest £25,000 would give me a return of £1,475 per year for 25 years (until age 91 - and you can take more if your health deteriorates). You could easily invest say, three quarters of this in a 5 year account, a tenth in a 3 year account and make a bit more  than 3%. And when interest rates go up (which they surely will from the rock bottom we've got now) the income you can take will be even more.

Sad to see the uk government jumping on this bandwagon. I reckon we all should keep the cash and as you say invest it and take an income from it, slowly drawing down the initial capital.

And if you die a bit earlier than expected, your family will get the cash that is left.

I also look on this site for good tips including those regarding my state pension due Nov 2015 which is £107 whereas had I been born a year later would be £144!  I was therefore interested in the top-up for our pensions article by moneywise.
Thank you Jeffrey &  Ceymor my interest depleted - any savings I have will go into ISA's.

Sorry - penion due Nov 2014

Does the Goverment and insurance companies consider us all as idoits to accept more theft from our Pension Funds.

Ran the spreadsheet again with just 2% interest on the £25000 capital.
Taking £1475 per year from the £25,000 will last 22 years (actually 21 years, 10 months and 20 days).

BUT it actually means that if you have the money in ISA's then there is NO income tax to pay at all, unlike any pension income.

And if you have only got it in a taxable savings account then not all of it is subject to income tax as you are drawing down the capital over 22 years.
Even in the first year the tax liability would only be on the £500 interest (i.e £100) as you would also take £975 out of your savings; so in the first year you would actually take £1375 in total. And the amount of tax on the interest decreases each year as you are constantly reducing your capital and increasing what you get, as a little more is taken from capital and a smaller proportion each year is from earned interest. Whereas the £1300 in the example above, depending on other income, might be fully taxable at 20% meaning that you will only get £1040 in the first year and £1040 plus CPI each year after that.

Makes both the examples above look a bit sick, even accounting for them increasing each year by CPI. I can't see this beating the cash savings I have outlined here.
As we must all remember that with interest rates at rock bottom right now, the only way is up; maybe not in the near future, but certainly within 22 years!!!!

REMEMBER as well that the cash is always there for emergencies, and if you don't use all of it, when you pop off your family will get the cash left (if there is any) whereas with both the schemes above, it just gets swallowed up.