Is it financially worthwhile utilising the governmentís new state pension top facility?
Last week, the government announced that they would be implementing a change to the state pension system that would enable retirees to purchase top ups on the amount they receive from their state pension each month.
Whilst this change is undoubtedly a positive one, with pensioners now having a greater level of power in shaping their financial futures, it can nevertheless be argued that not all people should utilise the facility, particularly if they have a history of poor health.
Under current conditions, a pensioner would have to pay a lump sum of £890 in order to receive £1 more from their state pension each week for the remainder of their lives, whilst an extra £10 would necessitate that they part with a sizeable £8,890. In order to acquire the maximum weekly top up of £25, an elderly person aged over 65 would need to stump up just over £21,000, which is a huge financial commitment for them to make considering that there is no certainty how long they will live for.
The reality is that in order to truly reap the benefits of this new policy, the reality is that you need to live beyond the average life expectancy for your generation, and you will have to take into consideration a wealth of health factors before deciding whether a top up is actually financially worthwhile. In particular, due to this actuality is appears that women stand to gain the most from the new top up system as they typically live longer than their male counterparts.
There are huge merits to the scheme, including the index linked payouts which means that the amount a pensioner receives in the future will now be based in accordance with inflation. This makes topping up a less risky investment because providing that you do stay healthy till at least the average age, you will continue to experience the positive effects of your top up. Moreover, the new ability for a deceased pensionerís spouse to acquire at least 50% of the state pension top up means that even if you were to die prematurely, youíd still have acquired some value for money.
The top up is obtained through voluntary national insurance contributions and can be made by any existing pensioner or someone due to retire prior to April 6th 2016. They will first become available from October 12th next year, and will run until April 1st 2017. It is thought that the move is a response to news that a new flat rate pension system will be adopted for anyone retiring after April 2016, who stands to have a better pension pot than those who have retired under current conditions.
Laith Khalaf at IFA firm Hargreaves Lansdown said: "This top-up scheme looks pretty generous compared to buying an annuity."
He did however point out that the extra income will be taxed, and argued that perhaps some people should consider utilising an ISA if they wish to build up their pension pot. This is certainly true, and pensioners should place some of their money away into an ISA because the scale in which the top up operates means that they could receive similar returns to bolster their weekly allowance than with the new scheme.
The National Pensioners Convention has challenged the usefulness of the scheme to anyone aged 65, arguing that anyone who pays the obligatory £8,90 to receive £52 more on their state pension payments each year would have to wait over 15 years in order to begin benefitting from the top up.
It adds: "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 the latest figures from the Office for National Statistics 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."
Whilst the convention is true in pointing out that small top ups have little value to the pensioner, it can still be argued that adopting a hybrid strategy of placing some of their money in an ISA and some into a top up is the most beneficial course of action to take for anyone aged 65. A top up of around £10 for each week can have a significant impact on a pensionerís finances in the long term, but does not represent the long term risk that a maximum top up comes along with. Moreover, having a mid-ranged top up and an ISA where other money is placed into will counterbalance the payable tax deficiencies that come along with the new scheme, and grant pensioners two ways to bolster their income.
Ultimately, if you are in poor health, or have a chronic illness, then topping up your state pension is not worthwhile as your family only stand to inherit 50% of the added amount and you are taking a risk by paying a lump sum for a long term gain. However, if you have a relatively comfortable level of disposable income, are 65 and have good health, then a mid range top up is the most advisable as it is low risk, and can be nicely supplemented with the tax free gains of an ISA as well.
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