Pension news: Invest £741 this year and gain an extra £237 a year income - for life
If you are one of around a million early retirees, a legal loophole means that you could boost your state pension and gain an extra £237 a year income for life, simply by investing £741 this year.
A recent article in the Daily Mail (20 June 2017) reports that the extra income is guaranteed to rise every year in line with inflation, earnings growth and 2.5% - whichever amount is higher.
This equates to an annual return of 30% a year — 12 times more than you could get from an annuity (an insurance product that allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life).
Who is eligible?
You may be eligible to take advantage of this opportunity if you:
• have taken early retirement, and
• are under state pension age, and
• are expected to receive a state pension of less than £159.55 per week
Early retirees with small private pensions or who want to maximise any spare savings earnings may wish to buy more government-guaranteed state pension.
People who have spent a lot of their career contributing to a salary-linked pension and who was taken out of the state top-up pensions by their employer (such as public sector employees - nurses, firefighters and the military etc.) as well as those who worked for firms which at one time offered final salary pensions, could benefit.
How has this opportunity arisen?
The move from the old to the new 'flat-rate' state pension (which came into force on 6 April 2016 for those reaching their state pension age on or after this date) means that, if you are an early retiree and you will receive less than the £159.55 per week rate of the new state pension, it is possible to continue building your pension up.
You can do this by making back payments of Class 3 NI contributions – which are, effectively extra NI contributions to fill any past gaps. You can go back up to six years to fill gaps in your National Insurance record but the important date is April 6, 2016, when the new state pension was introduced.
Do note, however, that if you have the full 30 years’ National Insurance credits needed to get the maximum basic state pension under the old regime, any back payments for years before that date will not boost your state pension.
Example case study
An example, cited by the Daily Mail, is of a teacher who retires at 60 but is not due to receive their state pension until they reach the age of 66. They could buy an extra £1,422 income per year for a contribution of £4,446 (based on current rates).
What you need to know
If you are eligible to “buy” more pension income, then it is advisable to check how a bigger state pension might affect any other benefits to which you are entitled – especially if you expect to receive pension credit.
You may already be entitled to free National Insurance credits if you’re on certain benefits (e.g. Jobseeker's Allowance) or Carer's Credit if you care for someone — such as grandchildren or an elderly parent — for over 20 hours a week.
Males aged 63-and-a-half or over also get free credits, although this limit is increasing in line with the women's state pension age.
Do note, there is no guarantee this opportunity will last forever - Steve Webb, ex-pensions minister in the Coalition government from 2010 to 2015, warns that: “The Government could shut down this scheme with very little notice. Given how little you could earn on the money in a savings account and the chances of forgetting, on balance it is probably better to do it straight away on a year-by-year basis.”
In summary, providing you won’t lose out financially overall by doing so (for example, if you are in receipt of other credits) this is an opportunity to fill the gaps in your National Insurance contributions and get a guaranteed extra £237 pension income a year for life.