Why topping up your State Pension has become more attractive
The Department of Work and Pensions (DWP) has recently issued a reminder to all those who have expressed an interest in topping up their Additional State Pension by up to £25 per week. The option to make Class 3A Voluntary Contributions applies to individuals who attained their State Pension Age (SPA) on or before 5 April 2016, i.e. individuals who receive, or will receive, their State Pension under the old rules. Read more below or watch my brief video for a visual explanation.
Why is this important?
It has been possible to make the Class 3A Voluntary NIC payment since October last year. When the Government announced the details of these earlier, they stated that the rate offered would be in line with the market. However, even when they became available it was not possible for a healthy individual to secure a pension annuity paying the same level of income as achieved from paying Class 3A NICs. Since then, annuity rates have been falling. Post the BREXIT referendum, they have nose-dived.
Comparing topping up to an annuity purchase
For an individual aged 66 looking to secure income of £1,300 p.a., with a 50% spouse’s pension that is index-linked, the annuity cost would be over £46,900, according to the Money Advice Service website on 28th October.
To obtain the same level of income from topping up your Class 3 Voluntary Contributions the cost would be £21,775, based upon the DWP calculator run on the same date.
In simple terms, the Government offer which was generous when it was launched has, due to the changes in the annuity market, become very attractive.
For those people who attained their State Pension Age on or before 5 April 2016 and who have spare capital (and are bemoaning the low level of cash deposit interest rates), consider the option of paying Class 3A NICs. Whilst it’s still on the table.
If you would like to read more about the rules directly from the DWP, download their State Pension Top Up Guide.