MSE News: The state pension top up – Martin's three-minute 'should you do it?' briefi 9 October 2015 at 3:01PM in Pensions, Annuities & Retirement Planning 42 replies 8.1K views

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On Monday, a scheme launches allowing millions of people to buy a top up to boost their pension by up to £25/week...

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The state pension top up – Martin's three-minute 'should you do it?' briefing




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Aquamania

Thank you Martin.

What I quickly took from your 3 minute briefing was

For those who do pay tax, I struggle somewhat to come up with scenarios where this is a great deal – even compared to putting cash in a savings account at a decent rate of interest.

As someone who expects they will pay at least some tax when they eventually reach retirement age, then I guess this is not for me.

But I'll check back next week for the full report to see if that is still a correct summary of the situation.

redux

Twitter post mirrored at the side of the forum:

"From Monday you can pay to top up your state pension - should you do it? Here's my 3 minute briefing "

I think that's potentially a bit misleading; from then people in certain age groups can do this, not everyone.

My previous understanding of this is that it's intended as a bridging arrangement for people retiring pretty soon who won't get the full new scheme pension, but would like to make up some of the difference. And therefore a one-off scheme for its limited timespan.

I could be under a misapprehension though. Is this about what are called Class 3A contributions or not?

But if that is what it is, why not introduce it as such, instead of dragging everyone through parts of until they realise it doesn't apply to them?

https://www.gov.uk/government/publications/additional-state-pension-top-up

kidmugsy

"You need to get the full state pension. You need to get (or be due to get) the full £115.95 current maximum state pension. If not, you'd be far better off using your money to buy extra national insurance years than doing this." What about someone already drawing the state pension. Isn't it too late for them to buy extra national insurance years? So couldn't the top-up have its attractions as an index-linked annuity - surely it could be a decent part of a diversified portfolio of investments?

SnowMan

The major thing missing from the briefing is that for the group who can pay class 3A (i.e. most of those who reach SPA before 6th April 2016) deferring the state pension achieves the same affect as purchasing extra pension through class 3a at a much cheaper cost below about age 80. So the general order of purchase should be

a) buy missing years first
b) then defer the state pension
c) then finally purchase extra pension through class 3A

For example someone age 65 who defers state pension of say £96.15pw for a year would get a 10.4% increase or £10pw (remembering that the 10.4% increase is on top of indexing). And remember even if your state pension has started to be paid from SPA you can still choose to defer later.

The cost of that £10pw from age 65, is the £96.15pw foregone during the year of deferment plus the £10pw not received in year 1, so the cost is roughly £5,520 (£106.15 x 52).

However to purchase £10pw from age 65 through class 3a contributions would be £8,900 (over 60% more )

Not until age 80 does purchasing class 3a compare favourable with deferring as the cost at age 80 is £5,440.

Clearly depending on how much State Pension you have you can adjust the period of deferment to achieve the same effect as purchasing extra weekly pension through class 3a and at a much cheaper cost.

kidmugsy

SnowMan wrote: »

The major thing missing from the briefing is that for the group who can pay class 3A (i.e. most of those who reach SPA before 6th April 2016) deferring the state pension achieves the same affect as purchasing extra pension through class 3a at a much cheaper cost below about age 80.

True, but it would be wise not to encourage people to view this as either/or. People with enough capital can do both.

SnowMan

kidmugsy wrote: »

True, but it would be wise not to encourage people to view this as either/or. People with enough capital can do both.

Which is why I said

So the general order of purchase should be

a) buy missing years first
b) then defer the state pension
c) then finally purchase extra pension through class 3A

kidmugsy

SnowMan wrote: »

Which is why I said ...

Am I right in assuming that once you've started your state pension you can't buy missing years?

SnowMan

kidmugsy wrote: »

Am I right in assuming that once you've started your state pension you can't buy missing years?

No. Even when you've started your state pension you can still purchase missing years, subject to the 6 year time limit, obviously only in relation to gaps for tax years ending before you reach SPA.

If I remember correctly those reaching SPA between 6th April 2010 and 5th April 2015 can also purchase up to 6 missing years going all the way back to 1975 (provided you already have at least 20 qualifying years), the deadline is 6 years after you reach SPA. The increase in state pension is not backdated to SPA but is an increase after payment of the voluntary contributions.

kidmugsy

SnowMan wrote: »

Even when you've started your state pension you can still purchase missing years, subject to the 6 year time limit.

Can you explain the six year limit, please?

SnowMan

kidmugsy wrote: »

Can you explain the six year limit, please?

For the main 6 year rule: You can only purchase missing years for the tax year you are in and the previous 6 tax years. So until 5th April 2016 you can buy 2009/2010 and later under this rule.

For those reaching SPA between 6th April 2010 and 5th April 2015 the additional chance to buy 6 years back to 1975 is 6 years from SPA. So if you reach SPA on 1st June 2014 you have until 31st May 2020 to pay.

In fact anyone reaching SPA after 10th October 2009 might still be in time as the going back to 1975 bit applies to them too.

(remember there are extended time limits for those reaching SPA after 6th April 2016, but this thread is not about them).