If an investment looks to good to be true that is because it is. Right?
Well, I would like to offer the exception. Class 3 national insurance.
The national insurance system is a mystery to many people and voluntary class 3 contributions are often overlooked. But they offer the opportunity for a supercharged investment return especially to those near retirement age.
An annual contribution of £741 – or £14.25 per week – will buy an inflation-linked return of £237 a year with the benefit of the pension triple lock.
That is equivalent to buying index-linked annuity paying more than 30 per cent, rather better than the 2.5 per cent or so on offer from insurers.
The opportunity is there for those who are retired, but below state pension age and have a projected state pension income of less than £159.55 per week – the level of the new state pension.
Steve Webb, director of policy at Royal London, told me he has estimated about 1m people could benefit. His numbers are based on teachers, nurses, police and other workers who were contracted out for several years and will not have built up much state earnings related pension (Serps) or state second pension.
They are likely to have much closer to the basic state pension of £122.30 per week.
Every year’s extra NI credit they earn after April 2016 will boost their state pension by £4.55 per week.
So why is not every early retired person being directed towards Class 3? All right, some, such as those on certain benefits and men over 63-and-a-half get automatic credits while others may expect to receive benefits such as pension credit, but otherwise Class 3 looks untouchable.
Someone who retires at 60 could over the next six years boost their annual state pension by £1,422 for an investment of £4,446 based on today’s rates.
This begs a number of questions, not least whether those sold small, low-rate annuities who are still below retirement age should be allowed to cash them in and use the money to boost their state pension.
Certainly it looks the ideal option for a chunk of any pension taken as a lump.
These benefits have only really materialised since the new state pension was launched in April last year. Although people are allowed to top up retrospectively for up to six years, for most who have 30 years' credits under the old system, it will not be worth going beyond April 2016.
Mr Webb tells me that Royal London has had 70,000 downloads of its factsheet Topping up your State Pension. I am not surprised. But while he is out there spreading the message, the government is keeping ominously quiet about this lucrative option.
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