State Pension – top-ups, is it worth it?
From 12 October 2015, pensioners can boost their annual income by increasing their state pension with a state pension top-up. If you are eligible you can make a state pension top-up until April 5 2017.Although DNS is not registered to give investment advice, and we are not allowed to recommend that you make any specific investment, for your information only, we want to advise you about UK state pension top-ups. It might be worth looking into this if you already receive a UK state pension or become eligible to receive one before 6 April 2016.
What will happen after April 2016?
After April 2016, the UK state pension will change to a flat rate (or single-tire), for those who reach state retirement age on or after that date. People who retire just before April 2016 could receive less than they would if they were slightly younger and qualified for the flat rate. This is why the government has introduced the top-up, to make it fairer, so that people can boost their old-style state pensions.
Can I benefit?
If you already receive a UK state pension, or will become eligible to receive one before 6 April 2016, you could take advantage of the UK pension top-up.
What do I do?
Providing you meet the criteria, you can pay a lump sum in the form of voluntary class 3A National Insurance Contribution (NIC). You can choose to buy between £1 and £25 per week of extra state pension to receive up to £1,300 a year, for life, on top of your current state pension.
The online calculator will illustrate that the actual amount you pay in order to receive each extra £1 of pension depends on your age at the time you make the payment. The same amount is paid for men and women aged 65 or over, and your health is not taken into account in your application.
A person aged 83 could pay a lump sum of £11,350 to receive an extra £25 weekly top-up. Hoping that the person lives for a further eight years and nine months, s/he will draw back the whole amount as extra pension, including any inflation increases. However, if this person has health issues that might decrease their life expectancy then it might be better to approach a commercial provider for a better return.
Example 1:You are 68 years old in October 2015 and decide you want an extra £5 per week (£260 a year) on top of your current state pension. The cost of an extra £1 per week for a 68-year-old is £827, so you multiply £827 by five.
TOTAL COST:£4,135 to get £5 extra a week for life
Example 2:You are 73 in October 2015. The cost of an extra £1 per week for a 73 year old is £719, so you multiply £719 by five.
TOTAL COST:£3,595 to get £5 extra a week for life
At least 50% of the extra pension can be inherited by a spouse, if they are, or when they become of pensionable age. People who reach state retirement age on and after April 2016 need to ensure they have enough complete NI contribution years, in their own name, to receive the new flat-rate pension.
Who might lose out by buying a pension top-up?
The top-up will be less tax efficient if it means you lose allowances or benefits as a result. Less well off pensioners in receipt of pension credit may find that their benefit is cut if their income increases as result of a pension top-up, and better off pensioners could see their extra pension push them into a higher rate tax band or nudge them across the £100,000 income threshold. So watch out!
If both you and your spouse or partner are potentially eligible for pension top-ups, it would be sensible for the person paying the lower rate tax band to make the payment and get the top-up.
Must you live in the UK?
You must have been a UK taxpayer, but you do not have to be living in the UK currently.
Pensions and NICs, how are they linked?
A minimum of 10 and maximum of 35 years NICs is required in order to be eligible for a UK state pension. If you have gaps in your NI record, you can make voluntary class 2 or class 3 NI contributions. People over state pension age can also pay class 3 NIC to fill in gaps in their NICs. Normally this would be within six years of the year you have a gap, but this has recently been extended to 2023.
Anyone who is not earning should apply for NIC credits so that their entitlement to the state pension is not affected. NIC credits are given automatically, for example, when claiming carer’s allowance, maternity leave, or during periods of statutory sickness. However, in other cases you need to specifically claim NIC credits. Check out the list of circumstances here.
How to top-up your pension
To top-up: online or by phone 0345 600 4270.
The deadline for top-ups is 5 April 2017. If you decide to top-up there is a 90-day cooling-off period during which you can get a refund if you change your mind.
Once I’ve topped up, when would my new pension rate come into effect?
After you make a top-up payment, the government does not make clear exactly when the extra pension starts to be paid. However, to make an informed guess, it is likely to be from the beginning of the tax year following that in which the top-up is paid.
Any questions? Schedule a call with one of our experts.