Topping up your state pension
(Andy Hillier – Pension Transfer Specialist)
A chat with an old family friend recently highlighted the importance of protecting your finances against inflation, in his words, “the best thing I've ever done financially, was protect my retirement income against inflation, things may have been tight in the first couple of years, but now we have enough money to do whatever we need”
For individuals who are in receipt of the basic or additional state pension before 6th April 2016, there is a limited window to purchase a state pension top-up, this is available until 5th April 2017.
There are some key differences between the state pension top up and the purchase of a traditional annuity. The state pension is;
Inflation Linked to CPI
Provides a minimum 50% pension to a spouse or civil partner.*
For a sixty five year old, this would cost £22,250 to provide the maximum available income of £1,300 per annum, equal to a return of 5.84% on your capital.**
The important points to remember are:
1. Make sure you already are entitled to the full basic state pension first; otherwise it may be more beneficial to buy additional Class 3 contributions.
2. The rates are different based on age, the older you are the cheaper the income,
3. You need to be prepared to give up your capital in return for an income. If you have a shortened life expectancy giving away capital may not be suitable
How does this compare to the purchase of an annuity? A healthy sixty-five year old investing £100,000 into an annuity, should offer an income of £3,324 per annum linked to the retail price index, with no spousal protection. So whilst limited in the amount you can purchase, the state pension top-up offers a much improved deal compared to an annuity purchase.
Source: Annuity Rates taken from Hargreaves Lansdown Best Buy Annuity Table. Rates correct as at 14th January 2016.
Planning for retirement is an important decision. If you require specialist advice on maximising your income opportunities, please call us 0161 233 4550. Further information is available on the Governments free Pension Wise website.
*Providing your marriage/civil partnership started before 6th April 2016 and your spouse/partner reaches state pension age after that date.
** Figures accurate as at January 2016 and obtained using Gov.uk state pension top up calculator. https://www.gov.uk/state-pension-topup