Last call to check if you're eligible for state pension top-up deal

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The 'state pension top-up' scheme was introduced in October 2015 for a limited period; it allows those who were over state pension age by 5 April 2016 to pay voluntary national insurance contributions (NICs) in return for an enhanced state pension.

This is not to be confused with the longstanding scheme of voluntary NICs, which allows those with gaps in their NICs record to pay additional contributions to fill those gaps. The 'state pension top-up' scheme is available regardless of whether you have a full contribution record or not.

The way that the scheme works is that you hand over a lump sum to the government and it increases the rate of pension you receive. The amount that you have to pay depends on your age.

For a pension boost of £1 per week or £52 per year, someone aged 70 would have to pay a lump sum of £779, whilst someone aged 75 would only have to pay £674. You can find full details of the rates based on your own date of birth here.

EXPLORE PAYING VOLUNTARY NICS FIRST

The amount of extra pension that you buy can be anything between £1 and £25 per week.

Once the additional pension is in payment, it is then uprated in April each year in line with the increase in the consumer prices index. Like all state pension payments, the additional pension is subject to income tax.

The price of these additional top-ups has been set by the government to be broadly neutral to the taxpayer. In other words, on average they expect that the extra money they receive in these additional NICs will roughly match the extra state pensions they will end up paying out.

This means that the top-up scheme is not subsidised, unlike the longstanding voluntary NICs scheme. It follows that if you can benefit by paying voluntary NICs to fill gaps in your NI record, it would be worth exploring that option first before considering the state pension top-up.

Paying state pension top-up is a bit like buying an index-linked annuity. You are exchanging a lump sum for an income for life, and that income will go up each year in line with inflation.

Obviously if you were to die early you would not get a good return on the money you had invested, but if you live for a long time then you would probably get back more than you had paid in.

Because insurance companies have to make a profit and because annuity rates are currently very low, anyone thinking about buying an index-linked annuity on a commercial basis should certainly think about 'state pension top-up' as a better-value alternative.

WHO WOULD THE SCHEME SUIT BEST?

There are some groups for whom this scheme is likely to be more attractive than others.

First, around half of all pensioners have an income below the tax threshold and therefore do not pay income tax. Although the additional state pension payable under the state pension top-up is subject to income tax, this will not matter if you remain below the tax threshold.

This means that in the case of a couple where one partner pays tax and the other does not, it would be better for the non-taxpayer to go for the state pension top-up.

Second, the return you get depends (as noted above) on how long you live. In general, women tend to live for longer than men, so in many cases it will be better value for a woman to go for the top-up than a man.

However, whilst this is true on average, it is also the case that individuals will have a much better idea of their own health status.

Those who seem set for a long and healthy retirement are likely to do better from the scheme than those who are in poor health, though these things are never entirely predictable.

Finally, there are some groups who should be wary of exchanging cash for a higher state pension.

This includes those who are in receipt of income-related benefits such as pension credit or help with rent or council tax. When you are assessed for these benefits, account is taken of your income.

If you buy extra state pension through the state pension top-up scheme, you are likely to find that your pension credit or other benefits are reduced as a result. It may be best to steer clear of this scheme if you are in this situation.

Steve Webb is director of policy at Royal London.


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