How to buy yourself a better state pension

Tom Wilson
12 October 2015
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.In exchange for a one-off payment, known as ‘Class 3A national insurance contributions’, participants can buy an increased state pension that rises in line with inflation.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.” Who qualifies?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? That depends on your tax rate and how long you live. A 65-year-old buying the £25 a week allowance would receive £22,250 back in gross income after 17.3 years, in real terms. A 65-year-old man can expect to live for another 18.3 years, and a 65-year-old woman will, on average, live for another 20.9% years, according to the ONS. Typically, men will be better off by £1,300 and women by £4,680 before considering tax, though if you’re expecting a retirement income that’s more than £10,660 it becomes more complicated. 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.”

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