In last week's portfolio clinic the readers featured were looking for ways to boost their retirement income. One of the ways suggested was to buy extra income using the state pension top-up facility; however, this option is only available until 5 April this year, so if you want to do this you should not delay.
If you are a man born before 6 April 1951 or a woman born before 6 April 1953 you can make a class 3A voluntary contribution to increase your state pension by between £1 and £25 a week, if you are entitled to the state pension. This top-up facility is being offered to people who had reached their state pension age before the introduction of the new state pension in April 2016, due to concerns they might not be as well off as those receiving the latter.
People born after 1951 or 1953 could increase their state pension with voluntary National Insurance contributions or by deferring their state pension.
How much you need to contribute to buy extra state pension depends on how much you want to get each week, and how old you are when you want to make the contribution - the cost of buying the additional state pension reduces the older you are.
For example, if you are a man born on 1 February 1950 and you want £25 a week (£1,300 extra a year) on top of your state pension, you'll need to make a lump-sum payment of £21,775. The government has an online calculator that shows how much you need to contribute at www.gov.uk/state-pension-topup.
Should you top up?
Whether you boost your retirement income via extra state pension depends on your personal circumstances.
The amount you could get is generally attractive compared with annuity rates. "For example, a 66-year-old male would need to pay £21,775 to buy the maximum £25 per week pension, and this equates to an effective annuity rate of 5.97 per cent," explains Gary Smith, associate director, financial planning at Tilney Bestinvest. "If the same individual put £21,775 into an index-linked annuity (that rises in line with retail prices index inflation), then the gross additional income provided would only be £740.52 - an equivalent annuity rate of 3.4 per cent."
Just like an annuity, the weekly income from the extra state pension is guaranteed for life, and is linked to the Consumer Price Index so benefits from inflation protection.
"Those who have available cash and who require an increased income should consider this option, especially as the income received offers an index-linked return," says Mr Smith.
It is also more attractive than money sitting in a bank account not earning much. And while money invested in the stock market, for example an equity income fund held within an individual savings account (Isa) wrapper or other risk investments, have the potential to make more there is no guarantee of this. They also have the potential to make substantial losses, eroding your capital or running out before you die.
But, as with an annuity, you cannot know how long you are going to live and extra state pension is only of real value if you live for a reasonable amount of time. If you have a life-limiting illness, for example, an enhanced annuity or just using the cash might be a better option.
"If you are in poor health extra state pension is not likely to prove an attractive option, as you might not live long enough to receive a return on the capital invested through income payments," says Mr Smith. "Furthermore, those with limited savings should weigh up the benefits of retaining access to a lump sum to cover any unexpected expenditure against the need for additional income."
As the top-up is state pension, while some of this could pass to your spouse or civil partner after you die, you cannot pass it on to other descendants as may be possible with assets such as savings, investments or self-invested personal pensions (Sipps).
Also consider your tax position. State pension is taxable if it is above the personal allowance, currently £11,000. If this extra pension income pushes you into a higher tax band it might not be worth it. Withdrawals from an Isa, by contrast, are tax-free.
Determining your best options with regard to taxation and pension planning is individual to everyone and can be complicated, so Jonathan Watts-Lay, director at WEALTH at work, says it could be worth getting professional advice.
If you decide to top up your state pension you can apply online at www.gov.uk/state-pension-topup. You will need your National Insurance number, and either your P60, passport or payslip to prove your identity.
You can also apply over the phone at 0345 600 4270.
