How to buy yourself a better state pension
Pensioners will be able to increase their state pension by up to £25 a week from 12 October 2015, thanks to a new government top-up scheme.
The cost depends on the age of the individual. A 65-year-old buying the maximum £25 a week would pay a lump sum of £22,250. That may sound a lot, but it’s much better value than you can currently get from an annuity. You’d have to pay £35,215 to get the same amount with inflation protection from a private pension.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “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.”
The deal is only available for 18 months to people retiring before 6 April 2016. It’s on offer to appease those who won’t feel the benefit of the new state pension, which arrives in April 2016 and is generally seen as more generous.
Is it worth it?
Moreover, £25 a week is certainly better than that available in the annuity market, but pensioners who don’t receive the full state pension because of their work history are eligible for an even better deal.
You’ll get the maximum state pension if you’ve made 30 years worth of National Insurance contributions, but if you’ve got less than this you can buy additional years to fill the gaps.
You’ll pay £733.20 for each year you buy, which gets you £3.86 or £200 a year. That’s equivalent to an annuity rate of 27%, and it is inflation protected.
McPhail adds: “Anyone looking at buying some additional state pension should make sure they have filled in any gaps in their standard record using the Class 3 scheme before looking at the Class 3A additional pension top-up scheme.”
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.