State Pension Top up

Robin_J

DWP have just sent me a leaflet about this.Is it worth doing to obtain extra weekly pension payment in return for giving them a lump sum?

Silvertabby

It depends on your circumstances.

How old are you

Do you intend working until State pension age

How many years NI have you paid / how many years were you contracted out (if at all)

Have you obtained your foundation amount quote (your State pension as at April 2016) and how much is it.


Or have you already reached State Pension age and these are the post retirement top ups?

jamesd

Class 3A national insurance contributions are better value than deferring your state pension if you are already at least 82 years old or for years past that age if you would want to defer more. For younger people, deferring the state pension pays more. A person who has already claimed their state pension can still start to defer once.

Age Increase Calculation
63 5.56% (52 / 934)
64 5.70% (52 / 913)
65 5.84% (52 / 890)
66 5.97% (52 / 871)
67 6.14% (52 / 847)
68 6.29% (52 / 827)
69 6.49% (52 / 801)
70 6.68% (52 / 779)
75 7.72% (52 / 674)
80 9.56% (52 / 544)
81 10.12% (52 / 514)
82 10.74% (52 / 484)
85 13.20% (52 / 394)

Whenever the percentage is less than the 10.4% for deferring, deferring wins in value for money.

However, if you will defer for many years the Class 3A can eventually have an advantage from being paid sooner if that lets you reach your target income and stop deferring faster.

Class 3A doesn't count towards the limit on how much "Additional State Pension" you can have, so it can be the only state pension increase option for those with that over about £164 a week, either now or after deferring. This exception also applies to a spouse who inherits it.

For those who don't have normal life expectancy and at the older ages it's worth checking to see whether an inflation linked annuity with spousal pension would pay more, or if one would pay enough more without spousal pension to make up for not getting the inheritability of much of the deferral or top up amount.

Deferring for long times is a useful way of purchasing what is in effect longevity insurance, which will continue to pay out however long you live.

kidmugsy

Robin_J wrote: »

DWP have just sent me a leaflet about this.Is it worth doing to obtain extra weekly pension payment in return for giving them a lump sum?

How old are you?

As for is it worth it, my wife is probably going to buy one because her ability to defer is used up, so the pension top up is the only decent index-linked investment available to her. It's a pity that she has to give up capital to buy an income exposed to income tax but there you are.

On the other hand, that's a lump of capital that will never be exposed to inheritance tax. Yippee, a 40% discount! (Actually we have no idea what the IHT laws will be when she shuffles off so my point is not entirely serious. Not entirely.)

pafpcg

DWP confuse the issue by referring to "topping up your state pension by making voluntary contributions" for several different methods; some will work better for you than other ways.

However, there is a specific limited-life scheme called "State Pension Top-Up" also known as Class3A contributions and described by Jamesd above. This scheme is available ONLY to those who reached their State Pension Age before 6th April 2016 (ie people eligible for the Old State Pension). Contributions to this Class3A scheme will cease to be available from 5th April 2017, so you have little over one month to apply if you wish to and make your contribution.

There has been extensive discussion of the Class3A/"State Pension Top-Up" scheme elsewhere in the forum, see here:

http://forums.moneysavingexpert.com/showthread.php?t=5339615
http://forums.moneysavingexpert.com/showthread.php?t=5515463
http://forums.moneysavingexpert.com/showthread.php?t=5509468

Jamesd's analysis shows that for some the value-for-money may be poor. But there are some circumstances where the scheme may be attractive - for example, if you're wealthy enough to be already deferring your basic State Pension and you have spare £thousands sitting in a bank account earning a pittance in interest, then the scheme is worth considering. Effectively, the scheme is offering an inflation-proof (CPI-linked) annuity at an annuity rate significantly better than current commercial rates. Remember, the "State Pension Top-Up" pension payments can also be deferred at the same 10.4% per annum rate as the basic State Pension, so it's not an either/or choice between defer-State Pension and Class3A contributions - you can do both, if you can afford it!

Robin_J

thanks Sivertabby for your reply ,I am already retired and this would be post retirement top up,if viable?

xylophone

I am already retired

When did you reach State Pension Age?

Robin_J

I retired in 2009

jamesd

Assuming that you are male and retired on reaching state pension age that would make you about 72 now. Deferring would pay you 10.4% per year of deferral while the Class 3A top up would pay you about 7%.

Assuming you are female that makes you about 67 now and Class 3A would pay you 6.15% while deferring would pay you 10.4%

That makes deferring a better use of your money, more income for the same amount of savings used.

The State Pension Claim Line should be able to help you to start deferring and are also the people to contact when you want to stop deferring.

kidmugsy

Your widow will inherit a bigger share of the extra pension you generate by deferral than of the Top-up additional pension. If you have heaps of spare capital you could do both.

I suspect that bonds are such lousy value that the old investment allocation of equities/bonds should now be equities/(annuities from HMG + cash).

jamesd

What that last post of mine didn't do is address whether you should do either. Are you male or female? What's your health like, anything that would give us some idea of whether you might live more or less longer than average? What would you do with the money if you didn't use it for this, maybe just leave it in a savings account?

Using the calculator below I get these break even numbers of years to defer using normal life expectancy:

If invested to get 3% plus inflation (shares, corporate bonds)
Male aged 72, 15 years to go, defer 1 year 5 months
Female aged 67, 22 years to go, defer 4 years 2 months

If using savings accounts to get 0% plus inflation
Male aged 72, 15 years to go, defer 2 years 8 months
Female aged 67, 22 years to go, defer 6 years 2 months

Using the calculator below I get these break even numbers of years to defer using the life expectancy that one person in four will reach:

If invested to get 3% plus inflation (shares, corporate bonds)
Male aged 72, 21 years to go, defer 3 years 9 months
Female aged 67, 29 years to go, defer 6 years 7 months

If using savings accounts to get 0% plus inflation
Male aged 72, 21 years to go, defer 5 years 8 months
Female aged 67, 29 years to go, defer 9 years 8 months

Someone who wants to know the background to this might want to read these things:

Does it pay to delay your state pension? And the calculator at https://www.johnkay.com/pension/ that is unusual because it takes the alternative investments into account.

Deferring a state pension - is it worthwhile? (Caution, this does not use cohort life expectancies and doesn't compare to other uses of the money. Use the two or five year above average results to try to compensate).

What is state pension deferral? Handy for its mention of benefits and living in a country where the state pension doesn't get inflation increases (defer longer).