The state pension top-up is far from the only way for people to increase their income in retirement.
Private pensions, deferring the state pension, voluntary national contributions under the established Class 3 system and extending your working life, are all alternatives to the current state pension-top offer.
Class 3 system
Instead of going down the Class 3A route (which technically tops up the additional state second pension) it may be possible and more beneficial for some people to pay voluntary national insurance contributions under the already established Class 3 system, says Malcolm McLean, senior consultant at Barnett Waddingham.
This would enable those who have a deficient contribution record, and therefore an entitlement to only a reduced rate pension, to plug gaps in their qualifying years and thus increase their main basic state pension up to the full rate.
Whether your clients are eligible to pay into this and how much it will cost them to do so, depends where the gaps are and when they occurred.
Mr McLean says the general rule is you can only fill a gap which is up to six-years-old.
So now, in 2015 to 2016, you can fill gaps back to and including the tax year 2009 to 2010. The cost of those contributions depends on how old the client is.
For 2009 to 2010 to 2012 to 2013 they will cost £733.20 for each year to fill, says Mr McLean.
Filling 2013 to 2014 will cost £704.60 and 2014 to 2015 will be £722.80, he says, adding that those rates will probably change from 6 April 2016.
Another thing to note is that some people are allowed to fill much older gaps going right back to 1975 to 1976. The people who can do this are men born 6 April 1945 to 5 April 1950 and women born 6 April 1950 to 5 October 1952.
They all reached state pension age between 6 April 2010 and 5 April 2015 and must also have at least 20 years national insurance contributions – paid or credited (though at least one must have been actually paid).
They must pay these extra contributions within six years from the date when they reached state pension age. So it is too late for the oldest in this group and there is not long left for some of the slightly younger ones.
Mr McLean says the cost is £733.20 for each year paid. This group can also pay to fill gaps back to 2009 to 2010, but only for years before they reached state pension age.
“You must bear in mind that it is only worth paying enough contributions to ensure you have 30 years. Paying for extra years after that does not increase your pension further. In exchange for the contributions you will get extra pension of around £200 a year from the date you pay.
“So the payback time for the cost of the contributions is less than four years. The pension you buy is basic state pension and will rise by at least 2.5 per cent a year until April 2020 and after that in line with earnings, unless the law is changed.
