Top-up your pension for half the price of an annuity

8 April 2014

A new state pension top-up scheme will allow pensioners to buy an extra £25 a week of state pension from next year, for around half the price of an annuity.

The scheme will be available from October 2015 for existing pensioners and those who reach state pension age before 6 April 2016 - women now aged 61 or over, and men aged 63 or over.

It will help those who would otherwise have been excluded from the £144-a-week single-tier state pension, due to be introduced in April 2016. The single-tier arrangement will join together the existing basic state pension and the Second State Pension into one simple payment.

The pre-April 2016 pension system comprises a basic state pension of around £110 per week, and then an additional state pension is not available to everyone.

"The government recognises that many pensioners feel rather aggrieved about being excluded from the new state pension system and is giving them a chance to achieve higher future state pension payments," says independent pensions expert Ros Altmann.

The top-up scheme was first announced in the chancellor's autumn statement last year, but today the Department for Work and Pension (DWP) has defined the new legislation.

Savers can gain the extra pension by paying 'Class 3A' voluntary national insurance contributions. The maximum amount that contributions can provide will be £25 per week. The scheme will only be available for 18 months from October 2015.

"This is another bold action in how we build a stronger economy through choice in retirement income," says pensions minister Steve Webb.

"The scheme will give [pensioners] a guaranteed, index-linked return and will be particularly attractive for women pensioners who will draw the higher pension for longer [because they have longer life expectancy]. It will also help the self-employed, who currently qualify for only the basic state pension."

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How much do you need to contribute?

As an example of the new scheme, the DWP sets out the contribution needed for a top-up of £1 per week. A 65-year-old individual would need to pay £860 as a lump sum to get a £52 a year top-up.

The contribution decreases with age, so for a 70 year old the rate per extra £1 a week reduces to £779, and by age 75 it is down to £674.

The maximum top up for a 65 year old is £22,250, which would provide them with an extra annual income of £1,300 a year for life.

As with the existing additional state pension, these figures will be increased in line with inflation and the top-up payout will be partially inheritable on death.

According to Laith Khalaf, head of corporate research at Hargreaves Lansdown, the scheme looks generous compared to current annuity rates.

"It is an olive branch from the government to those who retire before the new single-tier state pension is introduced in 2016," he says.

Altmann is equally enthusiastic. For a 65 year old, she says, the rate for an inflation-linked joint life annuity is around 2.9 per cent, so buying the equivalent of the maximum £25 a week top-up would cost around £45,000 instead of £22,250.

"Relative to the private annuity market, this seems a very good deal for many people," she says. "The price of buying these extra state pension rights has been set at about half the cost of buying an inflation-linked joint life annuity in the open market."

To help savers work out how much they need to contribute to boost their state pension provision, the government has launched on online calculator.

Find out everything you need to know about the new pension rules and how to plan ahead for the retirement you deserve with our new magazine, How to Retire in Style. The magazine is available to buy now from all leading newsagents, or can be ordered online at

This article was written for our sister website Money Observer

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