State pension top up scheme launches: what you need to know

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The state pension top up scheme launches in the UK today. What is it, and how does it work?

What is the top up scheme?

The state pension top up scheme allows individuals to increase their state pension entitlement above the maximum of £115.95 a week, by an additional £25 a week. They ‘buy’ this additional guaranteed income from the government by making a one-off lump sum payment.

The measure is part of the transition to a new, more generous state pension coming in from April 2016, worth up to £155 a week.

Who’s eligible to top up?

Men born before 6 April 1951, and women born before 6 April 1953 will be eligible. The older the individual is, the less they will have to pay in exchange for an income boost.

Individuals can use an online calculator to check their eligibility.

The Department of Work & Pensions estimates 265,000 people are likely to take up the scheme.

How long is the scheme open for?

It is available from 12 October 2015 until 5 April 2017.

How much can my pension be topped up by?

Pensioners can choose to top up their pension by between £1 and £25 a week.

Can I pass the topped up pension to my spouse?

In most cases, surviving spouses and civil partners will be able to inherit at least 50% of the extra pension.

How much do I need to pay?

The upfront cost is determined by how much an individual wants to get each week, how old that individual is when they make the contribution, and their life expectancy; the older they are, the less they pay for an income boost.

For a 65-year-old, an extra £10 of pension a week will cost £8,900. For a 75-year-old the contribution rate for the same amount of pension is £6,740.

Is it suitable for me?

Pensions minister Baroness Altmann has stated the scheme “won’t be right for everybody”, and it’s important for individuals to seek guidance to ensure it’s the right option for them.

Altmann believes the top up scheme might particularly appeal to people who have not accumulated full state pension rights through their working lives, such as women who gave up work to raise their children.

Are there any risks?

There is the risk that individuals won’t live long enough to reap the benefits of an increased state pension; they may put in more than they ever get out. The scheme is particularly bad value for those with reduced life expectancies.

When the scheme was announced in 2014, the National Pensioners Convention (NPC) warned that someone aged 65 would need to pay £890 to receive an extra £52 a year, meaning they would have to be claiming their state pension for more than 17 years before benefitting from the deal.

“A 65-year-old will have to weigh up the likelihood of living beyond 82 to decide whether or not this new scheme will give them any benefit. For some it will, but Office for National Statistics  figures show that average life expectancy for men is 79 and for women, 82. Given this, the top-up scheme looks like a bit of a gamble,” the NPC said.

What do the experts say?

Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “No private pension company can offer such an attractive deal; so if you are eligible and you want to buy yourself some inflation-linked guaranteed income for life, with death benefits for your spouse thrown in too, then this is the scheme for you.

“Whilst the scheme is a good one, we find it ironic that a government which has done so much to undermine the annuity market, is now launching a scheme which looks remarkably like a nationalised annuity business. We are also disappointed that the government hasn’t done more to help individuals to access state pension data and projection tools online.”

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