If you're a woman aged at least 64 or a man aged 66 or older, you should urgently investigate whether it's worth topping up your state pension – because the ability to do so closes at 11.59pm on Wednesday 5 April. For some, topping up will mean increasing their pension by £10,000s over the years. MoneySavingExpert.com's founder Martin Lewis gives his three-minute briefing.
This is all about topping up your state pension. This scheme allows women born before 6 April 1953 or men born before 6 April 1951 to pay a lump sum to get a guaranteed increase to their state pension.
It's been done as in April 2016 the new 'flat rate' pension was introduced for all getting the state pension after that point; this top-up is a one-off short-lived scheme that allows people who got their state pensions earlier to top it up to the same amount.
To do it you can apply online (you have until 11.59pm on Wednesday 5 April) or call 0345 600 4270 (have your national insurance number handy, phone lines close at 8pm).
There are other ways to top up your state pension, so you'll need to check first whether they're better for you. But it's crucially important you do this NOW, because if this is right for you, the door on the top-up scheme is about to close.
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Here are the five key facts on it:
- This is best for those who get the full state pension. If you don't get the full £119.30 current maximum state pension, there are other ways to boost your state pension that tend to work out better, such as buying extra national insurance years. Also, deferring your pension can be another method of getting more.
- The top-up adds £1 to £25 a week to your state pension. In other words, an increase of £52 to £1,300 a year, which lasts for the rest of your life until you die.
- The younger you are the more it costs. The amount you pay depends on how old you are when you do it, eg, at 65 it's £890 per £1 a week, at 85 it's £394 per £1.
- The increase you get is inflation-proofed. The amount you get will go up with Consumer Prices Index inflation. It is worth noting though that the state pension itself has a 'triple lock', meaning it rises with the higher of inflation, average earnings or 2.5%. So this payment could fall behind that to an extent (but there is discussion that the triple lock may be turned into a double lock with the removal of the 2.5% guarantee at some point).
- The payout is taxed. The cash is taxed at your normal rate, so if you're a 20% taxpayer, you'll lose 20% of it.
So who does this scheme work out best for?
When you play out various scenarios it's very clear who this scheme is designed to benefit.
- Non- or basic-rate taxpayers. If you're at the higher rate, a lot of the gain is eaten up in tax, and even at the basic rate a chunk is. Yet if you're a non-taxpayer (likely to be living only off the state pension), the gain here can work.
- 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 or 65, you have to live longer than the typical life expectancy for this to pay out. Here are a few scenarios.
- A non-taxpayer aged 65: You'd have to live until age 82 until you got back what you paid in.
- A basic-rate taxpayer aged 65: You'd have to live until age 86 until you got back what you paid in.
- A higher-rate taxpayer aged 65: You'd have to live until age 94 until you got back what you paid in.
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.
- If you're married or in a civil partnership. If you die, your spouse can inherit at least 50% of your top-up payment until they die (they only get it when they're of state pension age). So if you paid to get an extra £10 a week and you die, your partner will be able to get £5 a week until they die. If you have no partner, nobody will inherit your weekly payment.
Is it worth it?
Certainly for married people on the state pension with little other income who don't pay tax – this looks a good bet. Yet, perversely, they're the ones least likely to have the funds to be able to do this.
For those who do pay tax, you have to consider carefully whether this is better than just shoving your money in a savings account. Especially because the new personal savings allowance means basic-rate taxpayers can earn £1,000 of savings interest a year without tax (higher rate £500).
Yet there are some circumstances where this would be very useful.
- You live LONG. If you lived to 100, this is a great deal.
- High inflation returns. The top-up payments are inflation-proofed, your savings aren't, and inflation can be much higher than the amount you earn in interest, turning savings into losings.
- The 'Peter Stringfellow rule'. If you have a substantially younger spouse, then provided they don't remarry once you die, they're entitled to half of it once they're of pension age. So if you're 65 and they're 45, and you both live until 85, you'd get 20 years of it, then when you die they'd get 20 years (assuming they retired at 65).
Where this really comes into its own
However, where this really comes into its own is if we think of it as an annuity rather than comparing it with savings. An annuity is a product that gives you a payment each year for the rest of your life until you die, no matter how long you live. The aim is to give you lifelong security of income, regardless of any other factors.
In effect, this top-up scheme is a Government annuity that's inflation-proofed, and the effective rate is far better than you could get commercially.
For example, if you spent £10,000 on this aged 65 and lived 20 years, in total it'd pay out £11,680 (plus inflation). According to Hargreaves Lansdown the best standard annuity for the same amount would pay just £6,220 (plus inflation). And it wins by this type of proportion at every age (unless you were so ill you'd die soon so could get a seriously enhanced annuity, in which case you shouldn't be doing this anyway).
So if surety of income in case you outlive traditional life expectancies is your key concern, this can look like an attractive deal, especially if you are, or will become, a lower-rate taxpayer.
There's an irony that the Government launched this scheme the same year it allowed so called pension freedom, which was all about freeing people from buying an annuity, but don't let the disjointed nature of that policy cloud your decision.
In summary, while on paper putting money in a savings account is likely to win for most, that only works if you're prepared to spend the capital as well as the income and psychologically many people hate that – plus if you live much longer than expected, there's a risk you'll run out of cash. So the top-up can be a winner for those who want to bag safety for a long term.
That should help you make a rough decision, but for all the technical bits, see our State Pension Top-Up guide.