From today, men over the age of 65 and women over the age of 63 can now get up to £25 a week extra on their state pension, in return for a one-off lump-sum payment. This special top up is called a Class 3A voluntary national insurance contribution.
The full £25 a week is worth £1,300 a year and would cost a 65-year-old £22,250 compared to the £35,215 you’d need to get the equivalent income from a standard annuity. How much you will get will depend on your exact age; the older you get the lower the cost. Two other benefits include the payout is inflation-proofed, and for married couples and civil partners, the surviving partner receives at least 50 per cent of the additional pension.
No private pension company can offer such an attractive deal
The offer is open to existing pensioners and anyone who will reach state pension age before April 2016, in recognition of the fact that they will be ineligible for the new state pension which launches on that date.
The deal is available for 18 months. There will be a 90-day cooling off period for anyone who wants to reverse the transaction after it has been set up.
The Department of Work & Pensions estimates 265,000 people are likely to take up the scheme.
Is it worth doing?
Tom McPhail at Hargeaves 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."
The key to assessing value for money for this scheme is how long the investor might live for: "The better your health, the longer you expect to live, the better your eventual return will be," says Tom. Currently, the average life expectancy for women is 89.3 years and men 86.8 years. Remember, the income is taxable if it exceeds your personal allowance.
Pensions Minister Baroness Altmann said the top ups could be particularly attractive to women and people who have been self-employed who are looking to build up their state pension payments although it's important to get advice to ensure the top-up scheme is right for you.
There's a handy calculator on the Gov.co.uk website to help retirees to assess the cost of buying additional state pension. It can be accessed by clicking here. To register your interest in Class 3A, email email@example.com or call 0345 600 4270.
Class 3 National Insurance
Separately there is the Class 3 NICs scheme which allows anyone with gaps in their National Insurance record to buy additional years to fill in the gaps. This scheme is far more generous costing just £733.20 to buy an additional year of state pension, which would be worth £3.86 a week or £200 a year, meaning it would deliver pay-back on your investment within around four years.
"Anyone looking at buying some additional state pension should make sure they have filled in any gaps in their standard record using the Class 3 scheme before looking at the Class 3A additional pension top-up scheme," says Tom. Find out more about Class 3 here.
- Read our 10 ways to save money in retirement here. Plus all you need to know about the new state pension here.