A potentially attractive government scheme, allowing some people to boost their state pension, by paying in a lump sum, closes in April.
Time is running out, but there is still time to take advantage of the opportunity, if you act now.
What is on offer?
The Government has offered up to 12 million older people the chance to convert a lump sum into a guaranteed income for life, on terms significantly better than those available on the open market.
The scheme involves making a ‘Class 3A National Insurance voluntary contribution’ and whilst the proposal looks attractive, the public has largely ignored the opportunity. Former pensions minister, Steve Webb, who launched the scheme, believes that this is because many people are confused by the offer. He said: “From what I hear, take up has been low. I think part of the problem is that people don’t really understand it.”
The scheme is designed to help people who have retired on the old basic state pension of about £120 a week and consequently miss out on the higher flat-rate pension of £155.65, introduced in 2016.
How much is it worth?
Under the scheme, eligible pensioners can “buy” up to £25 a week extra state pension. For example, every extra £1 a week would cost a 65-year-old £890.
The maximum top up of £25 a week would cost £22,250.
The exact cost of buying the additional income depends on your age; to help you better understand the cost of topping up your pension, the government has a useful calculator, which you can use by clicking here.
The additional income is inflation linked and whilst it doesn’t fully bridge the gap between the old and new state pension, it will take those eligible closer to the level of the new flat rate state pension.
The offer is available to anyone who reached state pension age by 5th April 2016 regardless of their existing state pension entitlement.
Time is running out
The scheme is a transitional measure, and time is running out.
The lump sum must be invested before April 2017, when the offer closes.
Should you claim?
For many people who need income and have the necessary spare capital, the scheme looks attractive. Especially if you are in good health with a relatively long life expectancy.
However, despite the rate of returns, it might be less attractive for those with health issues, or those who need access to their capital in the future.
You need to calculate whether it pays you to invest, depending on your own personal circumstances; including age, health, marital status, tax bracket and inheritance plans.
If you have already considered the scheme and dismissed the opportunity, it may be worthwhile reviewing your decision. Since it was launched in 2014, falls in interest and annuity rates mean it now looks more attractive. Especially as it offers a guaranteed income, inflation proofing and a survivor’s pension; all relatively expensive to buy from an Annuity provider.
Of course, there are issues to consider. For example, the income ceases on death and you will lose access to your capital.
Getting help with your decision
To understand whether this scheme is right for you, expert advice is essential.
Time is running out so it is important that you seek that advice without delay.
If you would like to discuss the scheme, or have any questions about this article, please do not hesitate to get in touch.