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How state pension top-ups compare with buying an annuity

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For a Government that proclaims it has abolished the requirement to buy an annuity, the rates for the new Class 3A national insurance contributions appear to be a contradiction.  Take, for example, the £890 that would buy an extra £1 a week for a 65 year old from October 2015.

That equates to an annuity rate of 5.84 per cent, not that far off a table-topping rate for a single life level annuity with a purchase price of £100,000. However, Class 3A delivers an income linked to the Consumer Prices Index measure of inflation with, in most instances, a 50 per cent dependant’s benefit.Try to match those terms in the market and, given the small sums involved, the available rate will be under 2.7 per cent.

Play with the numbers and Class 3A contributions are often a better bet in terms of income than an ordinary pension contribution, even with higher rate relief. It can even make sense from October 2015 to use the new drawdown freedom to fund Class 3A contributions rather than buy an annuity.

Why is the Government being so generous? There is a distinct smell of politics: pensioners vote and the extra NICs income (estimated at £800m) will be welcome, while the true net cost to the taxpayer will take years to trickle through.

John Housden is a tax consultant

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