Pensioners can now top up their State Pensions by an extra £1 to £25 a week in exchange for a lump sum payment under a new government scheme.
Given that the government is currently trying to create a secondary market to allow people to unravel their previous personal pension annuity purchases, it seems a little unusual that they are simultaneously creating their own government backed annuity service by way of the state pensions top up. Nonetheless – it is certainly worth some people investigating.
This new scheme, launched on 12th October 2015, will run until 5th April 2017. The purpose of the top up scheme is to allow people approaching or past state retirement age to make a lump sum payment to increase their State pension. The reason for this is due to the forthcoming launch of the new single tier pension, which will offer a higher guaranteed rate of state pension for most people retiring from 2017 onwards.
Anyone reaching State Pension age before 6 April 2016 is eligible, the Government said.
Men aged 65 or older and women aged 63 or older are being offered a chance to increase their State Pension by up to £25 a week – – worth up to £1,300 a year.
The cost of a State Pension top up is based on a person’s age and takes average life expectancy into account. For a 65-year-old, an extra £10 of pension a week will cost £8,900, whereas for a 75-year-old the contribution rate for the same amount of pension is £6,740. The additional pension secured will also benefit from indexation in line with the consumer price index and therefore it provides a good hedge against inflation for the future.
The suitability of this pension will depend upon your financial circumstances. For anyone with a low income who is risk averse and could do with a boost to guaranteed income, then this certainly looks attractive. With the conversion rate for 65-year-old male at approximately 5.84% of capital then this looks very attractive compared to the comparable rates available on the open market for an indexed life annuity.
However, is important to remember that although this top up itself is likely to fall within your personal allowance, if you have income in excess of £11,000 per annum then this will mean that the additional income then becomes liable to further income tax.
It’s also important to be aware that this is in effect an annuity and therefore there is no return of capital should you die prematurely. If you are married and your spouse survives you, then they will be able to benefit from an ongoing income at 50% of the additional benefit you have purchased, however again there will be no payment of residual capital.
This really is a situation which requires individual assessment, but certainly it looks like an attractive option for many lower income or risk adverse pensioners.
The scheme will remain open for 18 months and unlike Pensioner Bonds there is not a limited amount of money available for this, so people do not need to rush with applications, officials said.
To apply for the scheme or for further information, please visit www.gov.uk/statepensiontopup. A brief information booklet on the scheme is available here www.gov.uk/government/publications/state-pension-top-up-booklet
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