Class 3A NI Contributions & Additional State Pension

The government is offering the chance to top-up their state pension by up to £25 per week (£1,300 PA) to anybody who is currently claiming state pension, or who will claim it by 6th April 2016. In this article we will take a brief look at the pros and cons of taking advantage of the offer.

The cost of the top-up for a 65 year old will be £890 per £1 of weekly income. This means the full £25 would cost £22,250. The cost reduces with age, and a 70 year old could buy the full top-up for £19,475. The full table of rates is available on the legislation.gov.uk website.

The Pros

The “return” on the investment is 5.8% PA for a 65 year old (6.7% PA for a 70 year old). There will never be any capital returned, and the income will be inflation-linked (although it will not be protected by the triple-lock guarantee). It can most closely be compared to an inflation-linked annuity, and on the face of it offers very good value – the best similar annuity rate available for a 65 year old is around 3% PA.

Interestingly, the government cannot offer gender-specific rates due to EU legislation. Therefore, due to the fact that women live longer on average than men, it is a slightly better deal for women.

The Cons

There is some protection built in for the income – the government has said that at least half of the top-up would be payable to a spouse or civil partner (the exact figures are subject to a few calculations), but there is no further protection than that. This means that the income would cease in the event that you and your spouse/civil partner were to pass away.

Another drawback is that the income will be taxable, where-as the funds could instead be used to fund an ISA and instead produce a tax-free income.

Additionally you cannot use pension funds to buy the top-up (as with an annuity), which means the purchase amount will not have benefited from tax relief.

There is also no facility to medically underwrite the income. People with medical issues or lifestyle factors such as high blood pressure can benefit from a higher income thanks to this, and that option is not available here.

Our Conclusion

On balance, we think this top-up is likely to work well for some clients, particularly those who have spare capital but are in need of income and who do not want to take any investment risk.

The top-up option is available until 5th April 2017, and as always the devil is in the detail. If you would like to discuss the choices available to you please let us know by getting in touch.

Please note: this post does not constitute financial advice.