Pensioners can buy £25 state pension boost

Economy 3 April, 2014 10:07

Pensioners will be able to buy an extra £25 a week in state pension from next year under plans published by the Government today.

The cost will vary depending on a person’s age. For a 65-year-old, each additional £1 a week will cost £890, the Department for Work & Pensions said. The maximum £25 addition will cost £22,250.

The Government has produced a calculator to show the costs more clearly at gov.uk/state-pension-topup. The offer will be open to all existing pensioners and anyone reaching state pension age within the next two years before the new flat-rate state pension is introduced.

The scheme was announced by George Osborne, the Chancellor, in his autumn statement last December. It is designed to offer fairness to those pensioners who will miss out on the new flat-rate state pension, which will be set at around £155 a week when it is introduced in April 2016.

Many women and self-employed people earn less than the full amount, having failed to build up entitlement to additional state pension payments during their careers.

The top-ups will sit alongside an existing scheme that enables pensioners to buy additional “qualifying years” to cover periods during which they may have stopped making National Insurance payments, such as when they were taking care of children.

The new scheme enables pensioners to increase their payout above the full “basic” state pension of £110.15 a week to £135.15 a week. This is still short of the new flat-rate amount.

Today’s announcement provides the first indication of the cost of buying additional state pension, which will rise in line with inflation. It also provides confirmation of the maximum top-up available to purchase.

There will be a short window for pensioners to take advantage of the offer, running for 18 months from October 2015. The Government will allow the top-ups to be inherited by a surviving spouse or civil partner, who will be entitled to at least 50pc.

Steve Webb, the pensions minister, said: “This is another bold action in how we build a stronger economy through choice in retirement income. The scheme will give a guaranteed, index-linked return and will be particularly attractive for women pensioners who will draw the higher pension for longer. It will also help the self-employed, who currently qualify for only the basic state pension.”

You register your interest at gov.uk/state-pension-topup or by calling 0845 600 4270 or 0345 600 4270.

Is it a good deal?

The scheme is generous compared to the rates on equivalent annuities, which turn pensions into an annual income stream. To get the inflation linked £52 a year, savers would need to spend nearly £1,500, according to calculations by Hargreaves Lansdown, the broker.

Laith Khalaf, a pensions analyst at the firm, said: "This top-up scheme looks pretty generous compared to buying an annuity from an insurance company. It is an olive branch from the government to those who retire before the new single tier state pension is introduced in 2016."

"The scheme offers pensioners another option for putting their savings to work, which will be particularly welcome given today’s low interest rates on cash held in the bank. For some, the secure inflation-linked income will be attractive.

"However the income is taxable, which means some savers should pause to consider whether an ISA may be a better, more flexible home for their money, if they are willing to take more risk."

He said investors can currently earn 3.5pc from an equity income fund within an Isa, with no further tax to pay. The income is variable, but over the long term it has the potential to rise too. By comparison, the state pension top-up provides a 65-year-old basic rate taxpayer with 4.7pc, or 3.5pc for a higher rate taxpayer.

The Isa capital could also appreciate in value, the money can be accessed at any time, and it can be passed on in full as an inheritance. "Of course, it has the potential to fall in value too," Mr Khalaf said.