Member Article

Buying more State pension - better ways?

LEBC clients are being advised there may be better ways to increase their guaranteed retirement income than taking up the offer to buy more State pension (up to £25 per week from a one off payment now).

“The answer depends on personal circumstances both now and in the future,” says Kay Ingram, director, individual savings and investments at LEBC Group, but options include deferring the State pension, an annuity or even an ISA.

“If you are drawing or will soon become eligible to draw your State pension, you can opt to defer taking it. It will increase by 10.4% for each year you defer. The increase can then be taken as annual income or be drawn in one lump sum when you start drawing the pension. As both options are taxed as income if you are still working and especially if you are a higher rate taxpayer now but will be a lower rate taxpayer later, this could be a better option than going for the one off top up.”

To get the additional £25 per week an individual needs to make a payment of £22,250 (at age 65) but assuming you can get the full state pension entitlement now, you only need to give up deferred income of around half the top up contribution required to get the same pension. If you are a higher rate taxpayer now the net income given up by deferring will be even less if you anticipate being a lower rate payer once retired.

“From April 2016 the deferral increase, for those reaching State pension age after then, will fall to 5.8% pa, still worth consideration” says Ingram. “For those already over age 75, it will cost £16,850 to buy the extra £25 per week State pension as a one off payment. However it is worth over 75s considering buying a purchased life annuity.

“This is especially the case if you expect to always be a taxpayer. Like the State top-up you won’t get any tax relief on your payment into the plan. However unlike the State pension, you will not pay any tax on the income received, as for most over 75s the income from a purchased life annuity is treated as tax free income.

“The benefit of an annuity is the choice of annual increases, a survivors’ income for a spouse or partner and a minimum number of payments guaranteed so that if you die, it will pay a minimum back to heirs.”

A further option Ingram says is to simply keep the investment in an Individual Savings Account (ISA). “This does not give a guaranteed income, nor does it give any tax relief on the way in but like a pension fund it pays only 10% tax on dividend income but unlike a pension, there is no tax on withdrawals out of the fund whether paid as a lump sum or a regular income.

“Surviving spouses or civil partners can, within three years of the death of their spouse/ partner, elect to inherit the deceased’s ISA value as an extra ISA allowance so that the survivor has the potential for much more tax free income and growth and still has the capital sum to pass on or spend.”

This was posted in Bdaily's Members' News section by LEBC Group Ltd .