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YourMoney.com Mailbag: Should my husband top up his state pension?

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02/12/2015
Dear YourMoney.com, my husband is thinking of using the new state pension top-up opportunity, is that a good idea? Jane 65, James 65

More than seven million Britons are being offered the chance to top up their state pensions.  Men over the age of 65 and women over the age of 63 can get up to £25 a week extra on their state pension, in return for a one-off payment.

For James to get an extra £1 per week (£52 per year) state pension for life, the lump sum contribution for a 65-year-old would be £890. To qualify for the maximum £1,300 additional state pension therefore requires an investment of £22,250.

“At first glance the extra income of £1,300 a year in return for an investment of £22,250 for your husband at 65 looks attractive, and it will be if he doesn’t smoke or drink, and is in good health and doesn’t want any risk or any return of capital when he dies”, says Andrew Pennie, head of pathways at Intelligent Pensions.

Based on current rates, from the Money Advice Service website, someone of 65 living in a G2 postcode (Glasgow), where the Intelligent Pensions head office is, who was average height/weight, a non-smoker, not a heavy drinker and generally in good health would get just £772 a year from the best annuity provider for a fund of £22,250.  If they were a heavy smoker, the income would increase to £1,140 a year and if in addition they were overweight and were taking medication for high blood pressure and high cholesterol it would be £1,237 a year. If you then add another unspecified medical condition then the best offer would be £1,280 a year.

“On the face of it, these rates suggest that the government offers the best value, except that the pension contribution would receive tax relief. If we assume your husband is a basic rate tax payer he would get 20% tax relief, and therefore a gross contribution of £27,813, the incomes rise to £971 a year, £1,429 a year, £1,550 a year and £1,604 a year,” adds Pennie.

Of course, not everyone age 65 will have sufficient earnings in the tax year to qualify for 20% relief, but conversely some people will qualify for relief at 40% or even 45%.

There is also the option of your husband deferring when he takes his state pension and instead living off the capital that he would have invested in topping up his state pension, which could produce a better result depending on his tax position and any other benefits.

“The figures above demonstrate that it might not be the best pension deal for your husband to top up his state pension, never mind other investment options which might offer tax-free income, which his pension will rarely be, or opportunities to take a modicum of investment risk which he might be happy to take, in return for higher income.

“Like all things pension, the decision to use the new state pension top-up is relatively complex and will depend on a host of individual factors. Unfortunately the government has not made things very clear and if your husband only has £22,250 to invest, he may not want to spend fees for specialist regulated advice to ensure he makes the best decision.  If he does decide to pay for advice and the adviser gets it wrong he may also be able to claim compensation which is reassuring to know; if he just does what the Government says and it is wrong for him, there is no comeback,” concludes Pennie.

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