Are you missing out on a pension top-up?
First published 31 August 2016 • Updated 25 July 2017
Hundreds of thousands of people are eligible for a market-busting deal to provide a better retirement income. Yet as of April 2016 fewer than 4,000 had taken the opportunity. If you haven’t yet considered topping up your state pension, you have only until April 2017 to act.
When the government made it possible for some people to top-up their state pension to receive a higher income in retirement, they expected more than a quarter of a million people to take advantage of the offer. Yet according to figures from Old Mutual Wealth (dating to April 2016) just 3,848 individuals had taken advantage of the scheme by April of this year – a pitiful uptake of just 1.5 per cent of expectations.
So why did the government predict the state pension top-up to be so popular – and why hasn’t it been? More to the point, are you eligible for it, and could it be the right decision for you?
Let’s recap – what’s being offered?
You can top up your State Pension if you are a man born before 6 April 1951 or a woman born before 6 April 1953, so long as you’re entitled to receive a basic state pension or additional state pension before 6 April 2016 (so you should already be receiving yours, unless you’ve deferred it).
You can buy up to £25 extra per week, with the cost depending on how old you are now. For instance, to get the full £25 weekly top-up will cost you £22,250 if you buy it at age 65. However, if you buy it aged 75, it will cost you only £16,850. You can use this government calculator to find the exact cost to you.
The value of the top-up
At first glance, £22,250 for £25 extra per week might not look very exciting. This is perhaps one reason why there has been such low uptake. However, when you take a harder look at the figures, this deal represents better long-term value (for the majority of people) than almost anything comparable on the market.
For a 65-year-old topping up their state pension, every £1 of additional weekly income costs a one-off payment of £890. That’s equivalent to an annuity rate of 5.84 per cent – more than double the rate you would currently achieve from an index-linked joint-life annuity on the private market. For a 75-year-old this effective rate rises to 7.2 per cent – quite unachievable for anyone without a very good guaranteed annuity rate.
To put it another way, if you were to pay that £22,250 at age 65 to receive your extra £25 a week, then by the time you turn 82 you will have received more money than you paid in. And if you live to be 90, then by then you will have received an additional £10,400 on top of what you paid. Finally, if you happen to pass the 100-year-old mark (as many more people are now doing) then you would have more than doubled your initial investment.
The additional benefits of the state pension top-up
That’s the most important thing to remember about the state pension – like an annuity, it will never run out during your lifetime. In addition, when you die, your spouse will continue to receive between 50 and 100 per cent of the amount. However, there are even more benefits that surpass those of an annuity.
Although the top-up is not protected by the state pension triple-lock, it will however rise in line with the Consumer Price Index (CPI), protecting it from inflation. Though you can buy an annuity that increases its payments each year, these are generally far more expensive than topping up your state pension.
Yet another advantage is that (unlike with an annuity) the rate is exactly the same for males and females, rather than being tailored to your individual life expectancy. Therefore women (who typically live longer) will get a particularly favourable deal, as compared to privately bought products.
Still not sure? Talk to an adviser
You may still have to think hard about making a large up-front payment in exchange for a modest additional weekly income. However, it’s worth pointing out that over 20,000 people handed over large lump sums to buy annuities in just the first quarter 2016 – more than five times as many as have chosen the top-up option so far. Yet the majority of those people will have been eligible to boost their state pension, and at a much more favourable rate. The likely explanation is that they simply weren’t away of the option, or of the superior value it offered.
Ultimately, your decision must come down to your own personal circumstances. You need to weigh up a host of factors including your other income, your savings and your plans in retirement. A financial adviser can help you assess the pros and cons, and so decide whether a state pension top-up is a good idea for you.
Remember, time is running out – the deadline for topping up your state pension is April 2017. As things stand, this is looking like the market-beating offer than nearly everybody missed.
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