Member Article

State pensions – anyone for a quick top up?

Actuarial calculations aren’t my mother’s strongest topic, but she is remarkably interested in the idea of being able to make additional payments that will increase her State pension by up to £25 per week. As a result, she’s now entered the world of the actuary as she tries to work out whether the opportunity is a bargain or not.

The offer isn’t actually available yet as she, and everyone else whose State Pension age is before 6 April 2016, will have to wait until 12 October 2015 before the contributions top-up period of just under 18 months begins. Helpfully, there is a calculator at https://www.gov.uk/state-pension-topup and this represents part of the changes in the State Pension that the current government has been making, and the new, voluntary Class 3A top-up NICs are part of a wider picture of choice in State pensions.

At the moment, it is possible to defer taking a State Pension and, for every 5 weeks that it isn’t taken, the pension increases by 1% - which works out at a 10.4% increase for each year of deferral, so it takes about ten years for the deferral decision to start to pay off. Alternatively, there is an opportunity to take an additional lump sum after a deferral of at least 12 months instead of the increased pension. But why would anyone contemplate this action when a bird in the hand is worth two in the bush?

Taxation: that’s why.

State pensions are taxable income, so anyone who currently works past retirement age but doesn’t intend to work forever, but who is also a taxpayer with a reasonable life expectancy, may decide that moving income into a later tax year will bring savings in tax on top of the enhancement. Since the accrual rate will halve for those who reach State pension age on or after 6 April 2016, this offer will look far less attractive in future.

With my defined benefit pension ceasing after moving to a career average basis and then being replaced by a defined contribution scheme, my SERPS and State Second Pension apparently losing much of their value when the flat rate State pension arrives, and with my State retirement date disappearing into the future - why do I feel that I have missed the boat?

This was posted in Bdaily's Members' News section by Baker Tilly .