Chance to top up your pension fund

Nearly a third of people aged over 55 either give or plan to gift money to young relations, the results of a new survey suggests.
Nearly a third of people aged over 55 either give or plan to gift money to young relations, the results of a new survey suggests.
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From October 12 year the Government is offering a unique state pension top up scheme. It will offer men and women of qualifying age a limited time to swap their savings for a lifetime increase in their state pension.

It applies to men born before April 6 1951 and women born before April 6 1953, and the top up must be bought before April 5 2017.

The benefits are that you can buy anything from £1 per week extra pension up to a maximum of £25 per week. For a sixty five year old the maximum £25 per week, which equates to £1,300 per year, would cost £22,250. Whereas the older you get the cheaper it becomes to get £25 per week as you have less life left in you. For example a seventy five year old would only have to pay £16,850 to receive the same benefit as the 65-year-old.

The top up payments are taxable like any other pension income and they also allow for a 50 per cent spouse benefit on death. In addition they are indexed linked with I believe the guarantee of the triple lock until 2020. This means that pensions are guaranteed an increase each year based on earnings growth, inflation or 2.5 per cent whichever is the highest. This triple lock could be of significant benefit if earnings growth is low and we remain at almost a nil rate of inflation as the 2.5 per cent is guaranteed. This would mean that if this financial environment continues the 2.5 per cent could be giving significant rises over inflation, and also cost the government dearly in the process.

Looking at the figures provided by the government it looks like the returns are attractive when compared to buying a private sector annuity, but there are many things to consider. For example, if you are healthy with the potential of long life expectancy and have a younger spouse the deal could offer good value. However, if you are in poor health it may not be worth risking a pension for life, but instead keeping your capital close to you to use or pass on. Other factors to consider are how much impact using a lump sum to buy a pension would have on your rainy day money, and also by buying the extra pension would it put you in a disadvantageous position with regard to tax. As always nothing is simple with regard to state pensions but it is certainly worth taking advice to ensure you make an informed choice.