Spending more or waiting longer? The newly launched State Pension voluntary contribution could be beneficial to you in retirement, but is deferring your pension a better financial decision?
What is it?
Between 12th October 2015 and 5th April 2017, you will be able to make a Class 3A voluntary contribution to your State Pension. If you are entitled to a UK State Pension and will reach your State Pension age before 6th April 2016, or have already reached it, you are eligible to add to your pension. By making a lump sum payment towards your State Pension you can increase your income by up to a maximum of £25 per week (£1,300 per annum).
What are the benefits?
Apart from increasing the amount paid to you each week, there are other benefits to making a voluntary contribution. As with the basic State Pension, it will be paid to you for the rest of your life, giving you a secure source of income without any investment risk. It is also linked to the Consumer Price Index, and is therefore protected against inflation.
In most cases, following your death your spouse or civil partner could receive between 50% and 100% of the pension top up once they reach State Pension age.
How much will it cost?
The cost depends on how much you want to increase your weekly State Pension by; you can choose from £1 to £25 per week. It also takes your age into consideration and the cost decreases with each year. Therefore, you might want to consider waiting until after your next birthday before making the payment. You can use the State Pension top up calculator to find out how much an income increase would cost you. (https://www.gov.uk/state-pension-topup)
The State Pension top up is taxable so remember to check how much you would receive after tax, if you are a UK tax payer. This may also affect any income-related benefits that you receive now or in the future.
Top up or deferral?
If you reach State Pension age before 6th April 2016, it might be a better financial option for you to keep your savings and defer your pension. For every year that you delay, you will receive a 10.4% increase in payments. Assuming that State Pensions are increasing by 2.5% per year, if you delay receiving your pension by two years, you would receive the same weekly amount as if you had made the highest voluntary contribution of £22,250.
After next April, when you reach pension age the deferral increase drops to 5.8% per year. Using the same assumptions, deferring your State Pension for four years would give you the same weekly amount as making the maximum voluntary contribution.
How do I apply?
To submit an application you can apply online, or by telephone as using the contact details listed on the Government website (https://www.gov.uk/statepensiontopup). Once you have applied, you will be sent a form explaining how to pay the voluntary contribution.
For more information, you can view the Government website or read the State Pension top up booklet here. If you are interested in this or looking at other ways of increasing your pension income, please contact us.