State Pension calculation - Is this correct?

Freecall

As I am aware that there is a fair bit of expertise on here, I would like to check that I have researched this correctly.

• Currently living on DB pension in payment along with investments.
  
• 7 years to go to state pension age.
  
• 38 years full NI contributions.
  
• Maximum achievable state pension £151.27 pw.
  
• Estimate based on contributions up to 5th April 2015 £119.30 pw.

My question -

If 7 years of Class 3 NI contributions are purchased at the current rate of £14.10 pw (which will equal 14.10 x 52 x 7 = £5,132.40), an additional pension of £31.97 (£151.27 - £119.30) will become payable.

Is this correct?

Obviously over the 7 years the cost of the Class 3 contributions will increase as will the pension payable but keeping everything in today's terms this represents an effective government backed annuity rate of 32%


NB : I recognise that the actual percentage rate will be somewhat lower because of the opportunity cost of the years that the state has the money but trying to keep it simple.

HappyMJ

With additional contributions you don't get your capital back at any point. Save into a personal pension and you can have the capital back.

You could save £14.10/week into a personal pension and you would get tax relief on your contributions. You would get annual growth which usually exceeds inflation. The money you put it in is yours to keep. If you die your beneficiaries would get the money. If you put the money into extra contributions you lose the capital.

If you think you might live longer than 15 years then the voluntary contributions could be worth it. I would just save the contributions instead....but that's my opinion.

Freecall

Thank you for your response HappyMJ but my question really related to the return on state pension contributions.

Tax relief would not be available because as I said, income is currently derived from a DB pension in payment along with income from investments.

I am pretty sure that I am correct on the return available, I just wanted to run it past those that have a good understanding of the state pension scheme to check.

aldershot

Look at it another way. If you do uplift your pension by £31.97pw, that is worth £1662pa. For a man age 67 to purchase an inflation linked annuity for that amount would cost around £48,000 at today's rates. If you can purchase that for around £5,132, it's a no brainer.

xylophone

Tax relief would not be available because as I said, income is currently derived from a DB pension in payment along with income from investments.

Even people who have no earned income can contribute up to £2880 into a pension and receive tax relief of £720.

http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest

HappyMJ

aldershot wrote: »

Look at it another way. If you do uplift your pension by £31.97pw, that is worth £1662pa. For a man age 67 to purchase an inflation linked annuity for that amount would cost around £48,000 at today's rates. If you can purchase that for around £5,132, it's a no brainer.

Is that seriously what an annuity costs? That's not worth it. I will definitely be cashing all of my personal pension out as soon as I reach 55 and putting that into investments that will earn much more than 3.4%....and I get to keep the capital. I get closer to 7.5% return as it is on my investments now with very little risk. Why would I buy an annuity paying half what I currently get?

The maths in the OP's post are wrong anyway.

greenglide

I will definitely be cashing all of my personal pension out as soon as I reach 55 and putting that into investments

Is it not already invested?

You don't need to cash it all in to invest it (there are tax implications if you do).

Freecall

aldershot wrote: »

Look at it another way. If you do uplift your pension by £31.97pw, that is worth £1662pa. For a man age 67 to purchase an inflation linked annuity for that amount would cost around £48,000 at today's rates. If you can purchase that for around £5,132, it's a no brainer.

Exactly my point. The reason I posted my original question was because I find it hard to believe that such a deal is really available and thought that I might have missed something.

The old adage of 'if it sounds too good to be true , it probably is' does not seem to apply here.

As you say, it's a no brainer.

:j

Freecall

xylophone wrote: »

Even people who have no earned income can contribute up to £2880 into a pension and receive tax relief of £720.

http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest

Yes, but this is in addition - I do that anyway.

BTW : The £720 is a bit misleading because you still have to pay tax on 25% of it. Worth doing though.

Freecall

HappyMJ wrote: »

The maths in the OP's post are wrong anyway.

Please correct me, that's what I am looking for. As I say, it looks too good to be true.

OldBeanz

As far as I understand your figures are correct, although searching I cannot find a definitive figure for the increase in pension pa. On here in round figures it has always been shown as pay £14 x 52 or £2 x52 self employed and gain £208pa which is why they are doing away with the self employed rate soon (17-18?). Although a couple of years older I am in a similar position so will be doing the same. I guess you have to keep your eyes open for the number of years the Govt will allow you to buy and any increase which might allow you to buy before the change was introduced.