Boosting retirement income with state pension top up
TheDepartment for Work and Pensions (DWP) outlines a new way of increasing retirement income.
State pension top up offers an opportunity to boost retirement income. In exchange for a lump sum payment, those who have already reached state pension age, or are reaching state pension age before 6 April 2016, can secure an index-linked, increased weekly state pension payment for life. Available from October 2015 to April 2017, the scheme could be an important part of any independent financial adviser’s (IFA) client’s retirement planning.
Richard Dyson, writing in The Telegraph, has called it a ‘state-backed deal paying 5.8%’, with ‘topping up’ increasing a claimant’s state pension from between £1 to £25 per week, that is, up to around £1300 per year. Guaranteed for life, the scheme provides an index-linked return protected against price inflation, and is also inheritable by a spouse or civil partner.
Unlike Class 3 ‘additional voluntary contributions’, which are designed to ‘fill the gaps’ in a claimant’s national insurance record, state pension top up (also known as ‘Class 3A’ contributions) provides the opportunity for people to add more pension on top of any existing entitlement. Contribution rates are set on an actuarially fair basis, with the size of the lump sum required determined by the person’s age and the amount they wish to increase their state pension by. Rates reduce as a claimant’s age increases.
In line with rules on inheriting additional state pension under SERPS, a spouse or civil partner may be able to inherit at least 50% of their deceased partner’s state pension top up. If the bereaved partner is under state pension age when they are widowed but is eligible for Widowed Parents Allowance the amount will be paid as part of that benefit; otherwise it will be payable when they receive their own state pension. Caps on maximum inheritable additional state pension will not apply to this scheme.
Before state pension top up launches on 12 October 2015, the government is advising the public to seek independent financial advice. While not suitable for everyone, state pension top up provides another option for state pensioners and advisory professionals to consider.
Like any conversion of capital to income, using capital to make a state pension top up contribution can have the impact of reducing a person’s taxable estate. Couples may wish to consider their tax status when deciding whether one or both partners make the contribution, and also their relative ages on application, as these will impact on payments resulting from state pension top up. In any case, those applying for state pension top up will benefit from a post-application 90 day cooling off period.
So what does this mean for an individual? For Andrew Cummins, retired, from London, a secure, boosted retirement income is a key consideration. For him the scheme makes good financial sense: ‘If you look at the return, you do the numbers, I think the economics of it look pretty good’. He also noted that the scheme’s index-linked nature made it even more attractive, as ‘You never know what’s going to happen with inflation'. If taken up at 66, an extra £25 per week for life will cost Andrew £21,775; adding £1 per week would have cost him £871. Others may want to add to an existing retirement portfolio, or simply be looking to secure an income for a spouse or partner.