Another week: yet another change in pensions

13 October 2015

Bill Longe 

On Sunday the government announced the introduction of a new scheme to offer pensioners a chance to top-up their state pension scheme and receive an increased income in retirement. The scheme applies to anyone who is already receiving a state pension, or is due to receive one before 6 April 2016. That means that men are eligible if they were born before 6 April 1951, and women are eligible if they were born before 6 April 1953.

The top-up scheme is being introduced to help those pensioners who will not be eligible for the new, and more generous, flat-rate state pension, which starts in April 2016.

The government has provided a calculator to help people understand how much the top-up will cost them. Whilst the calculator will prove useful it is not able to tell people whether they will be better off paying into the scheme or keeping their money in say their ISA account. The answer will be dependent upon many factors including for example inflation, the rate of tax, whether you claim other state benefits, the age of your spouse, and your health. These factors are relevant because you can leave an ISA to your family but your state pension dies with you.

The following example may give some indication of how difficult it is to get to the correct answer:

John is a single male aged 65 who wants to top up his pension by £25 per week. Over the years he has been a regular saver into cash ISA’s and has built up a tidy nest egg which is paying 1.5 per cent interest each year. John has other income and pays tax at 20 per cent and is unable to claim any other state benefits.

The cost of topping-up the pension will be £22,250.

If John were to assume an inflation rate of 2.5 per cent and the interest earned on his ISA’s were to remain the same, then he would need to live until he was about 85 to know whether he was better off paying the top-up or simply staying with his ISA’s.

There are just too many factors to take into account and indeed there are alternatives out there for people who have gaps in their NI records and will not be entitled to a full state pension or who want to increase their income in retirement. Paying into the voluntary NI schemes or other pension arrangements may prove to be the answer for some, and so should be investigated fully before taking advantage of this new scheme.

Whatever choice is made, changing any of the assumptions has a big impact upon the calculations, and put simply you will only know the correct answer once you are dead, and by then it will be too late!