What exactly is the State Pension top-up?

If you reached State Pension age before 6 April 2016, you are eligible to boost how much you receive each week by paying a single lump sum. This option poses a complicated set of choices for you, so here’s a quick guide to help you weigh them up.

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The state pension top-up – what is it, who can do it, and would it be good value for you? Here are the facts.

The basic State Pension

If you qualify for the full State Pension, you will currently receive £115.95 per week once you reach State Pension age. You may also qualify for the Additional State Pension (based on your National Insurance (NI) contributions) but only if you reach State Pension age before 6 April 2016. After this date a new State Pension will be introduced, paying at least £155.65 per week to those eligible for the full pension (you may not be eligible for the full State Pension if you have gaps in your NI contributions).

What’s new?

As of 12 October until 5 April 2017, you have the option to boost your State Pension by up to £25 per week if you are eligible for a top-up (see below) by paying a single lump sum (known as a ‘Class 3A voluntary contribution).

Who is eligible for a top-up?

You can choose to boost your State Pension if you are a man born before 6 April 1951 or a woman born before 6 April 1953, assuming you are entitled to receive a basic State Pension or Additional State Pension before 6 April 2016.

How much extra state pension can I buy?

You can buy as much as £25 extra per week or as little as £1 (probably not many will choose that!).

How much will it cost?

The cost of topping up depends on your age at the time – it costs less the older you are. For example, if you are aged 65 and want to top up your pension by £10 per week, you’ll need to pay £8,900. However, to do this at age 75 you will need only £6,740.

The government has provided a calculator on their State Pension pages so you can compare prices at different ages.

Is that good value?

Whether or not you’ll be quids-in on this deal depends on how long you live. In the above examples (£10 extra per week), if you top up aged 65 it will be 17 years and six weeks before you hit break-even point. If you top up at 75, it’ll take you just under 13 years to break even. However, average life expectancy at 65 is around 19 years for men and 21 years for women, so the average pensioner could expect to receive £1,040 more than they paid out in total, and roughly 50 per cent of pensioners could expect even more than that.

A person living to the age of 90 would profit by £3,640 in the first example (topping up at 65) and by £1,560 if they topped up at 75.

But would that beat a savings account?

Using the first example above:

Top-up at 65 for £10 extra a week = £8,900

Total pay-out by age of 90 = £12,550

Profit = £3,650

Annual compound interest equivalent = approx. 2 per cent

This would represent a decent rate of interest compared to investments that pay income (such as NS&I income bonds). But of course it’s really a lot better than such an investment, because of course you get to spend the money as you go along (rather than having to leave in invested all that time). What’s more, the returns are guaranteed and inflation-proofed, and include death benefits for your spouse too. It’s worth pointing out that no annuity currently available offers such a good rate. If you can reasonably expect to live a long time, it could be a very good deal indeed.

When should I do it?

If you decide that topping up would be good value for you, remember that the cost goes down the older you are – so if you wait until your next birthday you’ll get a better deal. Just remember that top-up won’t be available after 5 April 2017 (unless the government change their minds).

What if I have gaps in my National Insurance (NI) contributions?

You need to have paid NI contributions for 35 years in order to receive the full State Pension. If you haven’t paid NI for this long, your State Pension will be lower. Therefore it may be best for you to make Class 3 voluntary contributions first, before considering the Class 3A contributions (‘top-up’). You can find out how to do this on the government’s pension site.

Is it right for me?

To pay a lump sum of nearly £9,000 for just £10 extra per week for the rest of your life may not at first seem a thrilling prospect. However, when you take all the guarantees into account, it may well be something you want to consider as a way of minimising risk. Large lump sums are inherently more attractive to people, but ultimately long-term security can be more important. You should make your decision based on your financial circumstances and life situation as a whole – and a financial adviser can help you do just that. Find one today.