The big pension giveaways
It is not often the government will give you something at a knockdown price, but in fact it is currently offering two excellent and relatively unknown deals to enhance your state pension.
Postpone your pension
One is available if you delay taking your state pension. In compensation the government will reimburse the payments you missed at advantageous rates, either as additional income subsequently added to your state pension or as a lump sum.
Provided you put off claiming your state pension for at least five weeks, the government will increase it by 1% for every five weeks you delay. This equates to 10.4% for every full year you delay claiming, or an extra £1.40 a week for every £10 of your state pension.
For example, if you are entitled to the full payout of £110.15 per week, your basic state pension will be £5,727.80 a year. By deferring for one year you'll get an extra £595 (10.4% of £5,727.80). For two years' delay you would receive an additional 20.8%, or £1,191.38, and so on.
At a time when the best regular savings accounts are paying 3.25%, this appears an excellent deal and a good way to bolster your income. However, bear in mind that you would need to survive almost 10 years per year of delayed pension just to recoup the money not received during that year.
This boost to your income is therefore worth more the longer you live. According to the latest government statistics, the average life expectancy for people aged 65 is around 19 years for men and 21.6 years for women living in southern England. However, remember these are averages – there's a 50% chance you'll live beyond this estimate (and rather more actually, as the act of reading this magazine puts you in a socio-economic group that tends to outlive others).
You are allowed to delay taking your state pension for as long as you wish. Once you do start claiming, any extra accrued will usually increase in line with the annual increases in pensions set by the government each year. Currently they are guaranteed to increase every year by the highest of inflation, average earnings or 2.5% – 'the triple lock' introduced by the coalition in 2010. The magic of compounding means this could grow sizeably over several years.
You can also take advantage of this deal if you are already receiving your state pension and decide to stop claiming it for a while, but you can only start and stop once.
If you delay for a whole year, then you also have the choice of taking a lump sum payment of the postponed pension instead of increased income; the government will pay interest of 2% above the Bank of England base rate on that lump sum.
With interest rates at their current low levels, this is not so remarkable in itself, but it may suit some people who for instance might be taken into a different tax bracket if they take their state pension, perhaps if they are still working after state retirement age. Any lump sum will be taxed at the highest tax rate that applies to your other income at the time it is taken.
You might think that the reason the terms for delaying your state pension are so generous is because, by the law of averages, a few people who take this option will die while they are delaying, therefore costing the government nothing. In fact, in the event of your death, the government will pay the amount of state pension foregone to your surviving spouse or partner or into your estate.
This has one important restriction, however – if you're male (i.e. a widower or civil partner) you must be over state pension age at the time your wife or civil partner dies. Otherwise, your widower or civil partner may claim up to three months of your deferred state pension.
If you are unmarried your estate may similarly claim up to three months. Naturally, the government will not allow you to manipulate the benefits system, so to protect the Treasury you cannot delay your state pension to claim other benefits such as pension credit or housing benefit. If you do, this will be taken into account when working out your state pension uplift.
You must also be living in the UK to qualify for postponement. If you want to delay your state pen- sion, all you have to do is not claim it and it will automatically be deferred. If you are already in receipt of it and want to stop claiming, you should contact your pension centre (gov.uk/find-pension-centre).
Top up your national insurance contributions (NICs)
Under the government's new rules, which come into effect in 2016, people will need to build up a thumping 35-year national insurance record to be entitled to a full state pension. This is a considerable hike on the 30 years currently required, and for some people, particularly women, the full number of years may be hard to make up. However, if you've got gaps in your NI record, you can make voluntary Class 3 payments (a special type specifically for topping up any shortfalls) at very advantageous rates.
Payment for previous years is payable at the current rate, which is £13.25 per week, or £689 per year. The full state pension from 2016, when the new rules are scheduled to take effect, is likely to be £144 per week, or £7,488 per year. On that basis, each year of contributions is worth £213.94 (the state pension divided by 35), so the break even point on a one-off payment of £689, at which you effectively receive back the value of your additional payment, is 3.2 years of pension. After that, it is all profit.
Traditionally, periods of caring responsibilities such as looking after children or an elderly relative have counted as additional years in calculating NI records, but these concessions have also been whittled down over the years. For example, the former Homes Responsibilities Protection used to provide automatic credits for the care of children under the age of 16, but in April 2010 that was cut back to apply only to children under the age of 12.
Furthermore, NI records can be hard to calculate. It may be helpful to know that so long as you've paid sufficient NICs in one year, you do not have to be working for the full tax year to qualify. You may also be pleasantly surprised to discover that you automatically receive three years' contributions for the years you turned 16, 17 and 18. The best thing to do is to obtain a personal statement from HMRC (hmrc.gov.uk/ni/intro/check-record.htm).
Topping up your NIC gap must normally be done within six years of the end of the tax year for which the contributions are being paid. For example, if you want to pay for the 2007/08 tax year, then you must pay by 5 April 2014. You can do this even if you've already reached state pension age.
However, the government recently granted more time to people who might be adversely affected by the new 35-year rule because they are due to retire when the single-tier pension is introduced in 2016; these people can pay voluntary NICs for the years 2006/07 to 2015/16 at any time up to 5 April 2023. Furthermore, for the tax years 2006/07 to 2010/11, any payment made by 5 April 2019 will be at the rate applicable in the 2012/13 tax year; and for the remaining years up to and including 2015/16, higher-rate provisions will not apply until 5 April 2019.
Those reaching state pension age sooner - by 5 April 2015 - may also be able to pay voluntary Class 3 contributions for up to an additional six years on top of the standard six years, going back to 1975/76 to make up any gaps in their NIC record, but they must already have 20 qualifying years of NICs (including full years of credits).
People wedged in the middle, who will reach state pension age between 6 April 2015 and 5 April 2016, can also pay voluntary NICs to increase their basic state pension, but no special arrangements apply. If you're self-employed or living abroad, you can pay Class 2 contributions instead. These are cheaper, at the flat rate of £2.70 a week.
Both deals have in fact been offered for many years, but it is only as life expectancy has risen that they have become such good value. The government moves at a snail's pace, but is sure to revise the schemes at some stage, so there is an element of buying while stocks last.
This feature was written for our sister publication Money Observer
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
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.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.
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).