The Government Finally Rewards Savers

If you are male born before 6th April 1951 or female born before 6th April 1953 this article may be of great benefit to you.

In the 2013 Autumn Statement, the government announced its intention to introduce a scheme to allow certain people to top up their Additional State Pension.  This was finalised in the 2014 Budget.  This change will allow existing pensioners and those reaching State Pension age before 6th April 2016 the opportunity to gain additional State Pension.

The Key Facts:

  • Those already receiving State Pension or reaching State Pension age before 6th April 2016 will be eligible to purchase additional State Pension via Class 3A National Insurance contributions
  • They are able to purchase anywhere between £1 and £25 additional State Pension per week (£52 and £1,300 per annum)
  • Increased annually by the increase in prices (CPI)
  • Inheritable on death, with at least 50% passing to a spouse (if applicable)
  • Can be deferred
  • The offer opens on the 12th October 2015 and closes 1st April 2017

 

The question that has to be asked however is, are you getting a good deal by taking this up?

The Numbers:

The Government has set an “actuarially fair rate”, which means that over time the policy will be broadly cost neutral, but further investigation is needed to see exactly what you would be able to get.

For a 65 year old male who is retiring today, and wants to purchase the maximum additional state pension, it would cost him £22,250.  This would guarantee him an additional £1,300 of annual income, index linked, for life with 50% being payable to his spouse on death (if applicable).

If the same 65 year old male purchased an annuity for £22,250 on the same basis (CPI Linked and 50% spousal protection) at the time of writing, the same amount of money would purchase just £630 of annual income.

The Government scheme is offering £670 more income!

The table below shows the options available under the government scheme versus the most competitive annuity rate that is available (assuming no health problems)

Age Purchase (£) State Pension Offer Annuity Offer
65 £22,250 £1,300 £630
70 £19,475 £1,300 £680
75 £16,850 £1,300 £797
80 £13,600 £1,300 £911
85 £9,850 £1,300 £803

(Source: The Exchange May 2015, of course annuity rates could be worse or better between now and April 2016)

The Department for Work and Pensions estimates that there will be 7 million pensioners who will have enough savings to pay the new National Insurance Contribution. This just reinforces the numbers above, that for the majority of people who want a secure income in retirement; this offer should be given serious consideration, whilst the government is in a generous mood!

Please note the Financial Conduct Authority does not regulate Tax Advice. Please contact us if you feel you can benefit from this change.