State Pension top up: how to boost your retirement income by £25 a week

You have just days left to take advantage of the State Pension top up scheme. Here's everything you need to know.

Don't miss out on the State Pension top-up scheme

The Government is allowing people to ‘buy’ a boost for their State Pension, worth up to £25 a week or £1,300 a year for life.

But time is running out to take advantage of the scheme, which closes on 5 April 2017.

So you haven’t got long to decide if you want to swap part of your savings for a boost to your State Pension income.

We’ve taken a closer look at what you will have to pay and whether a top up is worth going for.

Who can top up their pension?

Those entitled to the basic State Pension before 6 April 2016 are eligible to apply to make Class 3A voluntary contributions. This means men born before 6 April 1951 and women born before 6 April 1953.

The cost of topping up

You can choose to top up your State Pension by between £1 and £25 a week, equivalent to an annual boost of between £52 and £1,300 a year for the rest of your life.

But you’ll have to hand over a lump sum in order to secure the deal, just as you do with an annuity.

The Government says what you have to pay depends on how much extra pension income you want to receive each week and how old you are when you make the contribution.

If you apply between now and 5 April, you’ll have 30 days to make your payment. 

You can use the State Pension top up calculator to see the lump sum you will need to hand over, but we’ve plugged in a few numbers to see how the costs vary.

Here’s what a £1-a-week top up could set you back.

*The deadline is 5 April 2017 so you may not be able to take advantage of this

And here’s what getting the maximum £25 a week boost might cost you.

*The deadline is 5 April 2017 so you may not be able to take advantage of this

The lump sum payable gets cheaper the older you are, so if your birthday is near it'd be worth waiting until after then to make the purchase.

How much will it save you? Those aged 65 will get a 2% discount by waiting until they are 66, while 90-year-olds can save 7% on the top up by waiting until they are 91 to make the purchase.

However, with the deadline fast approaching waiting until your next birthday may no longer be possible. Unless your birthday is before 5 April 2017 you won’t be able to take advantage of this trick to paying less.

Take control of your pension saving with a SIPP

Will you get value for money?

It's a grim thought, but one of the main things to consider is whether you'll live long enough to get back all the money you put in.

The maximum top-up on offer is £25 extra a week which is worth £1,300 a year.

For a 65-year-old this requires putting down £22,250, which would mean they need to live over 17 years to pass the age of 82 in order to make the investment worthwhile.

You’ll need to live even longer if your income is subject to tax. Those paying basic rate tax may only receive an additional £1,040, which means they need to live past 86 to get a return on their investment.

The older you are, the less extreme the number of years you need to live in order to recoup the value of your investment, as you can see from the two tables below.

First, the full top up for those who don't pay tax.

And now those looking for the full top up, but who do pay tax.

Office for National Statistics (ONS) data reveals the most common age for death in the UK was 89 for women and 85 for men.

Using this as a guideline you can see where the benefits of purchasing the maximum top up fall off depending on the age you are when you choose to buy.

However, you should also take your health into account to evaluate whether the deal is likely to be good value for money.

How does the return compare to an annuity?

Since purchasing a top up is similar to buying an annuity, which involves handing over your savings to an insurance company in exchange for a guaranteed income for life, it’s worth comparing returns.

For a 65-year-old the maximum £25 weekly top-up will cost £22,250 and will get you £1,300 extra annually, which equates to a 5.84% rate of return.

Using the Money Advice Service annuity calculator, we found a £22,250 pot would buy a 65-year-old non-smoker, who takes out a single annuity policy that increases in line with inflation, an income of £58 a month.

That works out at £705 year according to the calculator.

However, annuity rates vary greatly depending on things like your age, lifestyle habits, health and the type of policy you buy. So make sure you compare what you can get.

Take control of your pension saving with a SIPP

How does the return compare to a savings account?

With such a big lump sum of money to put down you should also consider whether you could get a better return from a savings account.

A 65-year-old investing £22,250 in the top fixed-rate bond over five years, which at the moment pays 2.3%, would generate an annual income of just £517 (assuming you're a basic rate taxpayer). That's not even half what’s available by purchasing the maximum top up instead.

So as it stands the maximum top up beats what the same money can get in a market-leading savings account.

How does the return compare to deferring the State Pension?

Another way to boost the amount of State Pension income you get is to defer claiming it, which you can do even if you’ve already started doing so.

If you reached State Pension age before 6 April 2016 you’re eligible for the basic State Pension and you can get 1% extra for every five weeks that you delay claiming it.

This amounts to 10.4% for every full year you put it off.

So, for someone getting the full basic State Pension of £119.30 a week or £6,203.60 a year, delaying for 12 months will get you an extra £645 a year.

You should work out how much it would cost you for the amount of extra income you want to get by deferring or using the top up system to see which one works out as better value for you.

Of course, if you don’t have a pot of savings to hand over, you won’t be able to top up your State Pension using Class 3A voluntary contributions and deferring your State Pension may be the best way to boost your income.

The Government rules state that you can still apply for State Pension top up if you’ve deferred your State Pension. You won’t get your State Pension top up income until you claim your State Pension.

Read more in our guide: Deferring your State Pension: how much can you get and is it worth it?

Is the scheme worth going for?

The State Pension top ups won’t be a good idea for everyone, but many could benefit from the scheme. 

You should take a close look at whether you will get real value for swapping a chunk of your savings for the guarantee of an income and make sure you double-check if an annuity, deferring your State Pension or even a savings account can get you a better deal for your money.

If you have gaps in your National Insurance record it will be more cost effective to make voluntary contributions instead.

These allow you to fill in the gaps for the last six years to ensure you have enough qualifying years for your full entitlement to the basic State Pension.

As well as these calculations you should also weigh up the pros and cons of the scheme and parting with your money. Below is a round-up of the main ones to consider before making your decision.

Pros

• The extra income you buy is inflation proof;
• If you live longer you’ll get more out of the scheme than you put in;
• Between 50% and 100% of the extra income you buy is inheritable by a surviving partner when you die;
• Older people in good health can benefit as they don’t have to hand over as much to secure a bigger income.

Cons

• You lose access to cash that you might need for emergencies later down the line;
• The extra income is taxable, so the extra boost might not be as big as you expect;
• The extra income could affect your eligibility for means-tested benefits like Council Tax support and housing benefit;
• You might die before you recoup the cost of the top up;
• You might be able to get more for your money with an annuity, especially if you are a smoker or in poor health.

Take control of your pension saving with a SIPP