Warning over new state pension top up scheme

Wrinkled female hand carefully holds a white piggy bank. Symbolic of pensions and senior poverty
Wrinkled female hand carefully holds a white piggy bank. Symbolic of pensions and senior poverty

Shadow Pensions Minister Nick Thomas-Symonds has warned that pensioners risk being lured into a state pension top up scheme that could leave them significantly worse off. He was speaking as a new scheme was introduced, allowing pensioners to pay a lump sum in order to top up their state pension.

The scheme was designed for people who will just miss out on the new flat rate state pension, being introduced in April next year. The idea is that they can boost their state pension by between £1 and £25 a week by paying in a lump sum.

The amount they will have to pay for this boost will depend on their age (and the older you are, the cheaper it is), but a 65-year-old would need to spend £22,250 in order to top up their pension by the full £25 a week.
Is it wise?

The initiative has been praised by pension experts, who highlight that you would struggle to get better value in the private annuity market - unless your life expectancy was particularly short. The government top up includes a guaranteed index-linked return, half of which can be passed onto your spouse when you die. Buying this sort of product in the open annuity market is incredibly pricey.

Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown said: "No private pension company can offer such an attractive deal; so if you are eligible and you want to buy yourself some inflation-linked guaranteed income for life, with death benefits for your spouse thrown in too, then this is the scheme for you."

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The concerns

However, Thomas-Symonds, warned that it's not going to be right for everyone who qualifies, and that people need to consider their own circumstances carefully. His concerns are largely the same ones that you face when you're deciding whether to buy an annuity with your pension pot or take it in a series of lump sums.

Buying the regular income provides peace of mind that the money will last as long as you do, but raises the possibility that you could pay out the lump sum, and die before you get the same amount back in income.

He is right: people need to consider carefully whether it will suit their circumstances. The cost of topping up has been calculated using average life expectancy, so if you suffer from ill-health you may not live long enough to recoup the lump sum.

A 65-year-old, for example, would have to live to the age of 82 in order to make the purchase pay. On average, they will, but you need to consider whether you're likely to make it to that age.


McPhail adds that this new top up is not the only way some people can improve their state pension. Separately there is the Class 3 NICs scheme which allows anyone with gaps in their National Insurance record to buy additional years to fill in the gaps. This scheme is far more generous costing just £733.20 to buy an additional year of state pension, which would be worth £3.86 a week or £200 a year, meaning it would deliver pay-back on your investment within around 4 years.

He says: "Anyone looking at buying some additional state pension should make sure they have filled in any gaps in their standard record using the Class 3 scheme before looking at the Class 3A additional pension top-up scheme."

But what do you think? Would you pay to top up your state pension? Let us know in the comments.

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