State Pension Top-Up: Is It Worth It?6th December 2015
Since 12 October some people have the option to top up their State Pension and receive up to £25 per week extra, in exchange for a lump sum payment which needs to be made by 5 April 2017. It represents an attractive investment opportunity for many savers, although depending on personal circumstances it may not be worth it for others.
Who Is Eligible?
The State Pension top-up scheme is only open to those who have already reached pension age or will get there by 5 April 2016. This means men born before 6 April 1951 and women born before 6 April 1953. Of course, you must be eligible to receive the British State Pension in the first place. Even if you already have full State Pension, you can still apply and get the additional income on top of that.
The idea behind the scheme is to compensate those ineligible to the new, more generous flat rate State Pension, which applies to those reaching pension age after 5 April 2016.
What You Will Get
You can buy extra State Pension of up to £25 a week, or £1,300 a year. This figure is the maximum – you can choose a lower amount, starting from £1 per week, at a proportionally lower cost. If you have a spouse, they will continue to receive 50% of it even after your death, should they outlive you.
How Much It Costs
The price is a factor of age. If you are 65, an extra £1 per week costs £890 now. If you want to get the full £25 per week, you will need to make a lump sum payment of £22,250. The older you are, the cheaper it gets, as you are, on average, expected to live and receive the income for fewer years. The top-up scheme is open even to someone aged 100 (in such case the price is £127 for every £1 of weekly income).
You can calculate the exact cost for your age and desired extra income using the calculator at www.gov.uk.
Is It Worth It?
Not everyone eligible will find the top-up scheme a good investment. There are several factors to consider:
- Your health and how long you expect to live. The longer you are able to receive the income, the more attractive the top-up is given the fixed lump sum payment.
- If you have a spouse. Because the scheme includes a kind of death benefit to your spouse, those without one are at a disadvantage. If your spouse is younger and healthy (therefore likely to outlive you by many years), it makes the top-up more attractive to you.
- Your tax rate. The income will be subject to tax. If you are a higher rate taxpayer or close to the threshold, keep that in mind.
- If you receive any means-tested benefits, such as housing benefit or council tax discount. You may lose some of these if your income goes up.
- Other investment opportunities. Because the State Pension top-up requires significant upfront payment, the expected (net, after-tax) return must be compared to expected return on other available investments. When doing so, don’t forget about the risk. Sponsored by the government, the State Pension carries less risk than most commercial investments and therefore it can be justified even when higher-yielding alternatives are available.
Should I Top Up My State Pension and How Much?
It is clear that some of the above listed factors are not particularly easy to evaluate. Moreover, they should only be considered as a starting point and your entire financial position and other circumstances must be taken into consideration. The Department for Work and Pensions themselves recommend people to consult their financial advisor before making the decision.