I chaired and spoke at a number of retirement income seminars last month – you may have been at one. While I was encouraged by the engagement and education of the audience in financial products, I was frustrated by the scope of the conversation.
In particular, I was surprised by how few financial advisers were talking about buying extra state pensions.
With the pensioner bond bonanza past, this is the next bonanza and the Telegraph have an article explaining why.
I won’t go into all the details as they are laid out via the link, together with a great Q&A by the evergreen Malcolm McClean.
It includes one set of numbers from Glenn Martin (a reader) which I will quote
A man aged 65 would have to pay £22,250 to buy the maximum top-up of £25 per week. That translates into a taxable “annuity rate” of 5.84pc.
Mr Martin took the assumption – based on Government figures – that this man would live an average 22 years, to age 87. If he did so his return, after basic rate tax but excluding the effects of inflation, would be equal to 0.3pc per year on the original £22,250 investment. The return for a higher-rate taxpayer would actually be negative at –2.3pc.
Glenn Martin’s calculations are sound but a bit negative. The main benefits of this scheme are they provide an insurance against living too long and against inflation eating into your money.
And before we get carried away with the joys of our new single state pension, let’s remember that even the upgraded version engineered by Steve Webb is not going to provide a full state pension for everyone. (this from the GAD Quinquennial)
So most people will need to top-up to get their full state pension (and even the full state pension is not nearly enough for most people’s immediate needs).
But enough about need – is it value for money?
If a couple wanted to buy an equivalent annuity from an insurance company, they would struggle to get a return of much more than 3% before tax, 5.84% is blinding value.
As a cold-hearted 53 year old I should urge Telegraph readers not to buy, as your purchase will result in a major bill for people like me.
This is a mammoth giveaway and I very much doubt that these rates will last, especially after I re-read the Government Actuary’s latest review of the state pension which suggest that future giveaways will be few and far between.
But being a sentimental bugger, I’ll tell any man born before April 6, 1951, and woman before April 6, 1953, to register your interest in buying the extra income by visiting the website at gov.uk/state-pension-topup or by calling 0845 600 4270 or 0345 600 4270.
You won’t be able to buy till October but that gives you the summer to think about it.
Once you’ve done your thinking- fill your boots.
Why are insurers and drawdown specialists not talking about this?
I suspect there are three reasons, none of which reflect well on the “pensions industry”
- We are still in love with financial products that provide us with initial and/or annuity income by way of commission. The loss of up to £45,000 of a couple’s liquid estate to purchase state pension represents a conflict of interest to many advisers. There is little ROI (return on investment) to the adviser in this.
- We are living in a time of deflation, it is easy to forget that we have one month of deflation in the last 720 months. The rest of the time, inflation has been a killer to real retirement income. Most people are going to have precious little inflation protection on any retirement income other than their rights to the state pension, £25 pw may not sound much, but £1300 pa of guaranteed inflation protection (triple-locked for at least five years is worth around £12,000 in itself. That’s half the £22.5k initial investment.
- We underestimate our longevity. The chances are we are under not over-cooking our expectations of how long we live. Insuring against the financial consequences of living longer than expected is both prudent and a source of future happiness. The state guarantee that this pension will be paid for the rest of your life makes the investment attractive to a single person, to a married couple this top-up state pension is a no-brainer.
If you are of an age and have spare cash, investing in additional state pension should be in your shopping basket.
If you need all the cash you can get right now or if you are seriously at risk of dying shortly, take it out again, but for most people this is a really sound investment and insurance.
And higher rate tax-payers (you lucky sods!)
Don’t be put off by the negative returns for higher rate tax-payers, it’s true that you will have to pay more of your investment in tax but you are likely to live longer! If you are lucky enough to have income for the rest of your retirement of more than £42,000 per annum, you are in good shape, you’ll be paying no more national insurance and the chances are that £22,5,000 is not going to make a serious dip in your capital reservoir!
This works for higher rate tax-payers too!