MSE News: The state pension top up – Martin's three-minute 'should you do it?' briefi

JezR

A category of people who cannot increase their pension by buying extra years are those who paid the married woman's stamp and have less than 20 years of full contributions. This was one group that the 3A contributions was intended to be able to assist via another route, should they want to take it up. As an actuarially neutral scheme it was never going to be generous.

jamesd

SnowMan wrote: »

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

Excellent highlighting of the priority order, though you might consider adding a deferral cap of 5 years or ending at age 78 for general guidance, because beyond those limits deferring might not provide the best payout level. Deferring can still be best, of course, those just serve to prompt more individual thought when it's not going to be as clear-cut to defer first.

jamesd

Someone at MSE really needs to get a clue about what the real life expectancies are, these two paragraphs are utter tripe:

"Those in good health and with a family history of longevity. How good value for money this is all depends on how long you're likely to live. For a basic rate taxpayer, for every scenario, barring a woman aged 62, you have to live longer than the typical life expectancy for this to pay out.

For example, for someone doing this at 65, as a non-taxpayer you'd have to live until age 82 until you got back what you paid in, as a basic rate taxpayer you'd have to live until age 86, and as a higher rate taxpayer you'd have to live until age 94. Contrast that to average life expectancies for someone at that age of 83 for a man and 86 for a woman. Therefore for most people the gamble is against them."

The average life expectancies for a 65 year old in the UK today are 86.7 years for a man and 89.3 years for a woman. That's from the official ONS cohort life expectancy tables for the UK.

This seems to be so poorly understood at MSE that even the MSE Pension guide gives two numbers, the pants under-stated numbers but then reasonably to completely accurate chance of living to a particular age numbers later on.

Is there any actual reason beyond just carelessness why MSE so routinely gets life expectancies so badly wrong? It just isn't that hard to go and grab the latest ONS spreadsheet and look up the correct numbers.

Pincher

My mother is 85, gets some state pension due to not many years of NI contribution, and is just over the personal allowance threshold, so pays 20% tax.

Now, £1 a week means £52, and £41.60 after 20% tax, so that is what she will receive a year if she pays out £394.

£394 / £41.60 = 9.47 years

So, if we have 0% inflation, she will have to live till 95 (= 85 + 10) to break even. She could have got some interest on the £394 over the ten years, so it looks like a minimum of surviving another nine years even with index linking to make it worthwhile.

On the other hand, if you have no heirs, or you hate your ungrateful brats, and were thinking of buying an annuity, so you don't expect the principal back, the annuity rate is:

£52 / £394 = 13.2%

Mind you, that is for somebody aged 85, so open market annuity could match that any way.


There is an interesting perspective, involving 40% inheritance tax.

Let us say you have £1.1mllion in assets, so it is beyond the joint £1million IHT threshold, the spill over £100k is subject to £40k IHT, so why not use some of it to top up the state pension. Or find a loose woman, and spend it.

brewerdave

Pincher wrote: »

Let us say you have £1.1mllion in assets, so it is beyond the joint £1million IHT threshold, the spill over £100k is subject to £40k IHT, so why not use some of it to top up the state pension. Or find a loose woman, and spend it.

...I read this out to my (60+) wife...who promptly spat out her cornflakes :rotfl:

Pincher

brewerdave wrote: »

...I read this out to my (60+) wife...who promptly spat out her cornflakes :rotfl:

Remind her that in the age of Sexual Equality, she can spend half on a fancy man ( on the occasion of the release of Suffragette ).

I consider paying George Osborne 40% a major shafting I wouldn't enjoy. Any alternative is more pleasant.

I am Pre-Humously suffering a traumatic episode, just thinking about it, despite it being a posthumous tax.

Slim

Quick query.

If during deferment you also purchase additional 3A pension does the annual 10.6% deferment increase apply to the additional 3A contributions pension bought but not yet being received?

Many thanks

jamesd

Slim wrote: »

If during deferment you also purchase additional 3A pension does the annual 10.6% deferment increase apply to the additional 3A contributions pension bought but not yet being received?

Yes. The class 3A buys more "Additional State Pension" and all Additional State Pension entitlements are increased while deferring.

The main concern for this cases is that the person might buy class 3A when longer deferring would be the better option, which in general would apply to deferral for up to five years that ends before age 78. Outside that range deferral for longer might still be the better option, it depends on the specific situation and is likely to be so for younger deferrers.

Pincher

Wasn't there something in the news about a discussion paper accidentally published, then withdrawn, in the last few days, about the pension triple lock being unsustainable?

In the even of high inflation, possibly as a result of all this QE, resulting in wage inflation, in the old fashioned way, this could be a very good investment.

On the other hand, a future government could decide to withdraw NHS resources for malingering old codgers and offer euthanasia with a sweetener: if you sign up for the Happy Ending program, you get an extra £1million in IHT tax free allowance. All those long suffering heirs waiting for you to hop it (poor Prince Charles) will be delighted to encourage you to take it. Frees up some housing stock as well.

PasturesNew

Rich peoples' problems.