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Govt unveils pricing plan for state pension top-ups

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.”

ADVISER VIEW

Laith Khalaf

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

ADVISER VIEW

Adrian Murphy

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

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Steve Webb said : “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”.
    It’s what he did’nt say that should be looked at.
    Is he going to accept money for this scheme and then renege on it by freezing like he does the current pensioners who have retired to countries where the government see fit to rob them of any indexing ?
    These pensioners were not all told , although he would insist that they were, and why having paid the mandatory contributions like everyone else should they not get the indexing like everyone else ?
    This makes no sense and is a definite case of discrimination which apparently the government are allowed to exercise irrespective of any agreements or equality acts or human rights.
    Seeing as they now approve of same sex marriage makes one wonder if a case can be brought for discrimination by a gay pensioner whose pension is frozen ! Well it worked once. What do we have to do to get justice ?

  2. Andy Robertson-Fox 12th April 2014 at 10:09 am

    Mr. Webb says the Teasury has allocated up to GBP 800 milliion worth of revenue – why?

    If pensioners are putting up GBP 890 and only getting it back at a pound a week should not the scheme be self-supporting and should not that Treasury funding be put to better use?

    He said once that the pension scheme was too complicated even for Einstein and needed simplifying; now he proposes yet another group within it…..

    He says it will be paid with my pension each week but if my pension is frozen would that return also be frozen and simply be a gift to the government never to be returned?

    But he also says that 50% would continue to be paid as a spouse’s pension if I predeceace my partner….but isn’t payment based on one’s deceased partner’s contributions to be discontinued?
    My wife is also several years younger than me and even when she reaches pensionable age will not qualify in her own right for a pension so it will, I presume, be forfeit.

    No, there is nothing in this scheme which shows it to be a benefit to the pensioner and every indication that it is another cash collection exercise for the government.

    As I said earlier that GBP 800 million the Treasury has allocated would be better spent elsewhere. A start would be by paying those who are being discriminated against already and those who would emigrate on retirement but for frozen pensions, regulation three and clause twenty and are being denied their right to do so.

    And with his own DWP telling him the cost of uprating frozen pensions is just GBP 580 million the Treasury would stIll have over GBP 200 million for pocket money

  3. George, Steve Webb also 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.”
    I disagree totally – it’s a lousy deal! If any one of those pensioners retires abroad to one of long list of countries where their UK state pensions will be frozen. Their add-on being attached to their state pension will be frozen too.
    What happens to their “guaranteed index linked return” then Mr Webb??

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