State Pension changes in 2016 - can I top up my pension?

Posted by siteadmin on Thursday 12th of November 2015.

A new initiative allows people who reach the state pension age before April 2016, to top up their pension. This includes those that are already drawing the state pension. The Government is allowing retirees to buy extra state pension by paying so-called Class 3A voluntary National Insurance contributions between October 2015 and April 2017. This will help people reaching state pension age before April 2016 who will not receive the new flat-rate state pension.

Some retirees will be better off under the new system (e.g. women and the self-employed) and the top-up will allow pensioners retiring before that date, and who may feel that they are missing out, a chance to build up a higher future state pension income. Among those who probably won’t achieve the equivalent of the flat-rate state pension of around £151, and will be interested in the top-ups, are people who’ve had career breaks and not paid NI for the full number of years and women bringing up children who’ve missed out on the additional state pension.

How much you’ll pay for the extra state pension will depend on your age, with the cost falling as your age increases and your life expectancy falls. The maximum extra pension you can buy is £25 per week, thus:

· At age 65 increasing your pension by £1 per week will cost £890, or £22,250 for an extra £25 per week;
· At 70, the cost is £779 for an extra £1 per week, or £19,475 for £25 per week;
· At 75, the cost is £674 for an extra £1 per week, or £16,850 for £25 per week;
· At 80, the cost is £544 for an extra £1 per week, or £13,600 for £25 per week.

Making the extra pension purchase can be done either online or by telephone, using a one-off direct debit, online banking transfer or by sending a cheque. Your weekly state pension will increase with immediate effect, although there’s a 90-day ‘cooling-off’ period, during which you can change your mind and get your money refunded, less any payments you’ve already received.

The question is should you top up?

The answer depends on a number of factors. In addition to those mentioned above you should also consider your attitude to risk and your life expectancy.

If you have a low risk threshold the guaranteed pension will offer some comfort, particularly if you have little by way of inflation-proofed pensions.

If you have a high risk threshold there is the opportunity cost of paying out say £19,475 to purchase an additional £25 per week. It means you will have to live for 15 more years just to get your own money back. What more could you have done with that money to get a better return?

If you enjoy good health and foresee no problem in living for another 15 years then you will profit from the deal for every week you live thereafter.

If in doubt- seek advice.

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