Thousands seek advice on state pension ‘top-up’
On Monday the government launched its state pension top up scheme which allows individuals to increase their basic state pension by up to £25 per week in exchange for a one-off lump sum payment.
The scheme, known as ‘Class 3A National Insurance contributions’, has been likened to a ‘nationalised annuity business’ by some advisers and is open to those already in receipt of their state pension as well as those who reach state pension age before 6 April 2016. If eligible, individuals will have 18 months from 12 October 2015 to apply for the additional pension and the DWP estimates, 265,000 people are likely to take up the scheme.
Although annuity sales have declined since the introduction of the pension freedoms rules in April this year, there is still a place for inflation-linked guaranteed income for life in many client’s portfolios and they should take this opportunity to seek professional advice on whether this is an appropriate investment for them to make.
With ‘cash in the bank’ continuing to offer record low returns, this might offer an attractive alternative. According to the government’s online calculator, which is designed to act as a guide only, a 65 year old could buy an additional £25 per week state pension for £22,250. Using these figures, a couple may therefore be able to secure a guaranteed income, with protection against future inflation of £50 per week for a little less than £45,000. Needless to say this is likely to be more than they are currently getting from their savings account.
The figures are only part of the story however and there are important considerations which, depending on their circumstances and financial objectives, will impact every individuals and family differently. These include the death benefits of the new scheme, income and inheritance tax implications as well as an individual’s potential eligibility to traditional Class 3 national insurance contributions, which, in many cases, may be more generous than the new Class 3A scheme.