Top up scheme for state pensions launched

retirement golden couple©iStock.com/AleksandarNakic

THE Government are offering retirees, and those about to retire, a limited chance to increase their weekly state pensions by up to £25 by making a lump sum payment.

The scheme, called Class 3A, runs for just 18 months and is designed to benefit those who aren't eligible for the more generous flat rate pension that starts in April 2016.

However, the top ups could reduce some people's benefits and make little financial sense for those who don't have a full National Insurance contribution record.

How does it work?

The scheme basically involves buying a Government-backed annuity - paying a lump sum now for guaranteed extra pension payments for the rest of our lives. The maximum extra we can receive is £1,300 a year, or £25 a week.

That means that the most a 65-year-old could invest would be £22,250, as this would give them a weekly increase of £25.

If they want an extra £10 a week, then they'd only need to invest £8,900.

In both cases, the top up payments are protected against the rising cost of living, and will rise with inflation as measured by the Consumer Prices Index (CPI).

Nothing new

This idea isn't new - there are plenty of private sector annuity products. However, the Government's scheme does offer a better rate of interest.

According to investment provider Hargreaves Lansdown, an equivalent private sector annuity would give an annual return of 3.69%.

The Government would, by contrast, give a return of 5.84% for those topping up at the age of 65.

Who's eligible?

Eligibility for the scheme is limited to men born before 6 April 1951, and women born before 6 April 1953.

The amount of investment required to get the maximum £25 a week top-up is linked to age: the older we are, the less we have to invest.

This is because the Government calculate how much they will need to pay out based on the average life expectancy, which is 83 for a man and 86 for a woman.

So, if someone who was 65 wanted an extra £25 a week, they'd need to invest £22,250, but an 80-year-old wanting an extra £25 a week would only need to pay £13,600.

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The scheme obviously becomes better value for money for those who live beyond their life expectancy, as the Government will be paying out for longer.

When we die, our spouse or civil partner will inherit between 50% and 100% of the payments.

Tax considerations

The top ups are subject to taxation at the normal rate - which means that a basic rate taxpayer will lose 20% of their top up while those taxed at the higher rate will lose 40%.

It does, however, mean that people who don't have to pay tax - because their income is too low, for example - will get back everything they put in.

The scheme is also only really viable for people who have a full national insurance contribution record.

Those who haven't - usually people who've been self-employed, and women who have gaps in their employment record because they had children - are likely to be better off filling those gaps by making voluntary contributions, known as Class 3 contributions.

In addition, those who claim means tested benefits - particularly the guaranteed element of pension credit, housing benefit, or council tax support - could find that contributing to either of these schemes may see those benefits reduced accordingly.

Pensions Minister, Baroness Altman admits that "it won't be right for everybody and it's important to seek guidance or advice to check if it's the right option".

Why is this being done?

At the moment, people who have at least 30 qualifying national insurance years receive £115.95 per week as a state pension.

However, come next April, the Government are introducing a new flat rate pension. Briefly, the changes will mean that people who have paid national insurance for 35 years will receive a weekly state pension of £151.25.

But those who retire or have already retired will continue to get the lower rate, unless they choose to top up their pensions using the new Class 3A scheme.

The Government have provided a calculator to help people considering the top up scheme work out how big an investment they're likely to need to make.

Anyone interested in applying to join the Class 3A top up scheme can either call 0345 600 4270 or go online - and be ready with their national insurance number and proof of identity.

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