BR Blog: State Pension Top-Up


Filed Under: Private Client

Written by: Martin Reynard

In April 2016, the current multi-layered State pension is to be swept aside in favour of a single tier payment of about £155 per week.

There is no change for those who will have already reached State pension age, whether or not the State pension has yet been claimed. However, the Government is allowing this group the chance to top up their existing State pension entitlement by up to £25 per week. If market annuity rates are anything to go by, the so-called State Pension Top-Up comes with a 30% to 40% discount.

The top-up scheme was launched on 12 October and will run until 5 April 2017. It is open to men age 65 or over and women age 63 or over as at 6 April 2016.

The top up can be bought in units of £1 per week. The cost, known as a Class 3a National Insurance contribution, depends upon age. For example, it will cost a 65 year old £890 to buy an extra £1 per week pension, a 75 year old will pay £674. It might be sensible to wait until after your next birthday before topping up by 5 April 2017.

The extra State pension will increase annually in line with inflation (CPI) and at least 50% will continue to be paid on death to a surviving spouse or civil partner.

The State pension is taxable, so the top up scheme will appeal more to non or basic rate tax payers than those already paying tax at 40% or higher. Indeed, higher rate tax payers who are still working might see a better result by making additional private pension contributions. Also, a higher State pension income will impact on income related State benefits such as pension credit.

While the top up scheme offers good value, for those with recent gaps in their NI contribution history, the existing Class 3 voluntary contributions are more beneficial and should be considered first. The Class 3 rate for 2015/16 is £733, securing an extra £3.86 per week.

All options are worth exploring and, if in doubt, please take professional advice.