Would you benefit from the government’s State Pension top-up?

Did you know the State Pension is changing?

There have been a number of new pension rules over the past year, and radical changes to the State Pension take effect in April 2016. This will provide a retirement income that is expected to be around £151 a week, compared to the current full basic State Pension of £115.95 a week.

To boost the retirement income of people who retire before April 6 2016, the government has unveiled a new top-up opportunity. In effect, they can purchase an annuity worth up to £25 a week from the government. It lasts for the lifetime of the purchaser, and can also be passed to a surviving spouse or civil partner.

The question is, is it worth it?

The cost

The top-up is not a freebie – it is an additional purchase rather than a benefit. How much it costs depends on your age and how much you want to purchase: you can add £1 to £25 a week, and the older you are the lower the cost.

A 65-year-old would pay £22,250 to receive the full £25 a week, and would need to reach 81 to recoup that sum. In comparison, it would cost £16,850 for a 75-year-old and they would need to live for a further 12 years.

The government has launched a top-up calculator to help people work out how much it would cost them to increase their weekly retirement income by up to £25.

This top-up may be more appealing to people who prefer the security of an annuity over the flexibility of income drawdown – especially as an annuity of the same value could cost twice as much – but the gamble is whether they will live long enough to recoup the investment, especially as the income is taxable. For this reason, a person with a family history of dying younger may be less inclined to top-up than a person with better odds of longevity.

On the other hand, the ability for a surviving spouse to receive at least 50% of it may be a compelling incentive. The top-up also rises with inflation, which should help to protect its value over the years.

What are the other options

There is no obligation to purchase this top-up, and it is more appropriate for some people than others. For example, people with a full National Insurance contribution record and a spouse or civil partner may find it most appealing.

If you do not have a full National Insurance contribution record then filling in the gaps may be a better starting point, and the cost is £733.20 for an additional £200 a year in State Pension income.

It may also be worth considering deferring the State Pension; for people who retire before April 6 2016, their State Pension increases by 10.4% each year that it is deferred. This higher amount is paid out for life, or can usually be taken as a single lump sum.

Whether or not to top-up your State Pension is not an easy decision, and the government is suggesting people take financial advice first.

What do you think of this new opportunity? Let us know with a comment below.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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