“More choice – no guidance” – the basic state pension top-up.

cashThe basic state pension, second state pension and soon to be single state pension are annuities purchased from the State by National Insurance Contributions.

With all the noise around the annuities you purchase from insurance companies, we can easily forget we are purchasing annuity every year we participate in the UK National Insurance system (even if we are not in work).

Though it doesn’t cost you this much in national insurance companies, the value of your full basic state pension, were you retiring today is around £180,000 – in other words that’s how much you’d have to pay for it if you used an insurance company.

I’m not a party to the economics of the social security system but we now have a little insight on what the DWP reckons a fair “offer” is based on current market condition

Here’s it is (the bits in italics are from the DWP press release)

Pensioners and those who reach pension age in the next 2 years will be able to get up to £25 of additional State Pension a week.

So for £1,300 pa (who works in weeks except footballers?), the up front cost is £22,250.  The great thing is that the income is indexed, the not so great thing is that this payment is not going to attract tax relief nor can you have a quarter of your contribution back tax free.

So far so good.  It is important that people pre-plan their financial affairs and it’s good that the offer is being announced well in advance of launch. (see below)

There are relatively  few people who will quality but they include women and the self-employed who may have limited entitlements to the Basic State Pension and SERPS

Basically if you are a

  • a man born before 6 April 1951 (ie 63 or older)
  • a woman born before 6 April 1953 (ie 61 or older)

you can buy between October 2015 to April 2017 as the State Pension top up will be available from October 2015 to all those reaching State Pension age before 6 April 2016.

 The scheme will allow people the opportunity to get inflation-proofed additional State Pension by making Class 3A Voluntary National Insurance contributions.

The cost of a State Pension top up is based on a person’s age and takes average life expectancy into account. For a 65-year-old an extra £1 of pension a week will be £890, whereas for a 75-year-old the contribution rate for the same amount of pension is £674.

A calculator is available online which illustrates the contribution rates based on age and how much people wish to increase their additional pension by at www.gov.uk/state-pension-topup

The top ups can be inherited, with a surviving spouse or civil partner entitled to at least 50% of the additional State Pension


We suspect this is a great offer. Assuming that private sector annuities remain as depressed as they are today. A great offer for a limited number of people who would otherwise have purchased a private annuity.

It would cost a whole lot more to buy this annuity from an insurance company (at today’s rates) and as it’s paid out with your existing state pension, it’s dead easy.

So it is going to have to be incorporated into the new Annuity Guidance Framework being established by the FCA and become one of the options  discussed.

But the problem is it is marketed like a dead fish on the slab. There is simply no indication from the Government that this is a good deal, no advice or guidance as to whether the rate used to calculate the cost represents value for money.

It would be very helpful if the Government Actuary, who set the rates, would give people like us some more information to help us give guidance to members, whether the “us” means DC trustees, members of the insurance IGC or one of those people who are going to be on hand to deliver the “guarantee of guidance”

All we get from the DWP is a press release ending with political platitudes

This measure along with the newly announced Pensioner Bond that will be available from National Savings and Investments in 2015, demonstrates the government’s commitment to a fairer society by improving outcomes for those in retirement and providing increased flexibility for people to make the most of their savings.

My guess is that the DWP are worried that there will be losers in the transition to the single state pension in April 2016 and that this group of soon to be pensioners are most at risk.

The DWP can hardly bang on about the private sector being untransparant , when we have so little transparency on how the rate was set and whether it will be adjusted if private sector annuities become cheaper.

With choice comes responsibility, choice without guidance is dangerous, let’s hope that the DWP will be a little more forthcoming about this choice and just why they are promoting it.

This article was first published at http://www.pensionplaypen.com/top-thinking

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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