The Department for Work and Pensions has unveiled the pricing plan for its top-up scheme to allow pensioners to boost their state pension entitlement by up to £25 a week.
In the Autumn Statement, Chancellor George Osborne said people will be allowed to make Class 3A voluntary National Insurance contributions to boost their state pension.
The DWP set out further details on how this would work last week.
Top-ups can be made from October 2015 for 18 months.
Contributors must have entitlement to a UK state pension and reach state pension age before 6 April 2016 when the single-tier state pension is introduced.
The new rules mean someone aged 65 will get an extra £1 of state pension a week for every £890 they give to the Treasury.
The rate improves the older you are so 70-year-olds will pay £779 to get £1 back while 75-year-olds will pay £674 for every extra £1.
The top-up, available up to a maximum of £25 extra per week, will be added to the state pension in the week when Class 3A contributions are paid.
There will be a 90-day cooling-off period after purchase when the decision can be reversed and cash can be refunded.
The top-up will accrue the same rights as a state pension, including inheritance rights, with a surviving spouse or civil partner entitled to at least 50 per cent of the additional state pension.
HM Revenue & Customs will handle applications and collect the money while the DWP will pay the top-up by revising pension payments.
The Government says there will be no impact on the private sector as this is a different market and it expects the changes to be revenue-neutral.
The DWP says that around seven million pensioners have enough savings to make extra payments but expects only 265,000 to access the scheme.
Government polling found 20 per cent of pensioners were very or fairly interested in using the scheme, with those under 70 showing the most interest.
Speaking at a Reform conference in London last week, pensions minister Steve Webb said he expects the scheme to be popular and the Treasury has allocated up to £800m-worth of revenue.
He said: “It is a pretty good deal. The scheme will give them a guaranteed, index-linked return and will be particularly attractive for women pensioners, who will draw the
higher pension for longer. It will also help the self-employed, who currently qualify for only the basic state pension.”
Investor Profile director Jaskarn Pawar says: “The more options you have at retirement the better so you can tailor your finances to meet your needs. For people with a lot of cash, this could be a good option for securing an income.”
This top-up scheme looks pretty generous compared to buying an annuity from an insurance company.
It is an olive branch from the Government to those who retire before the new single tier state pension is introduced in 2016.
The scheme offers pensioners another option for putting their savings to work, which will be particularly welcome given today’s low interest rates on cash held in the bank.
Laith Khalaf is head of corporate research at Hargreaves Lansdown
I cannot see many people taking up this offer as they would rather have the cash in the bank. This seems like another political move rather than anything useful to pensioners.
Adrian Murphy is partner at Murphy Financial