2015
The new flat rate state pension and the ‘top-up’ scheme
David Flowers / 0 Comments /
The new flat rate state pension and the ‘top up’ scheme
Those retiring after 6 April next year will be the first to experience the latest big shake-up of the state pension – the introduction of ‘the flat rate’ pension.
Presently those in receipt of state pensions receive the basic state pension plus additional pensions, like the state 2nd pension (S2P) and the state earnings related pension scheme (SERPs). These will be abolished and the whole system replaced with a single, tiered, state pension up to a maximum of £155.65 a week.
So, what does this mean for those who have retired or are due to retire before that date?
The Government is offering the opportunity for those who retire before the introduction of the flat rate scheme to ‘top up’ their state pension income. It works like this: In exchange for a lump sum, those eligible can purchase extra state pension income up to a value of £25 a week – for life. The lump sum required is based on your age and the amount of ‘top up’ you wish to purchase, which is not too dissimilar from an annuity.
We illustrate a few examples below to show the cost of adding £520 or £1,300 to the annual pension and what that represents as a return after tax. Bear in mind that this is like an annuity income – in other words, it only gets paid whilst the pensioner is alive.
| Age | Increase in annual pension before tax | Lump sum cost | Rate of return (non-taxpayer) | Rate of Return (basic rate taxpayer) | Rate of Return (higher rate taxpayer) |
| 65 | £520 | £8,900 | 5.8% | 4.7% | 3.5% |
| 70 | £520 | £7,790 | 6.7% | 5.3% | 4.0% |
| 75 | £520 | £6,740 | 7.7% | 6.2% | 4.6% |
| 80 | £520 | £5,440 | 9.6% | 7.6% | 5.7% |
| Age | Increase in Weekly pension | 4-weekly pension | Annual pension before tax | Cost | Rate of return (non-taxpayer) | Rate of Return (basic rate taxpayer) | Rate of Return (higher rate taxpayer) |
| 65 | £25 | £100 | £1,300 | £22,250 | 5.8% | 4.7% | 3.5% |
| 70 | £25 | £100 | £1,300 | £19,475 | 6.7% | 5.3% | 4.0% |
| 75 | £25 | £100 | £1,300 | £16,850 | 7.7% | 6.2% | 4.6% |
| 80 | £25 | £100 | £1,300 | £13,600 | 9.6% | 7.6% | 5.7% |
To receive an exact calculation, the government has helpfully produced a calculator that can be accessed by clicking here.
So, for someone aged 65 to receive an extra £520 a year from their pension (or £10 per week) a lump sum of £8,900 would be needed. You would need £22,250 to purchase the maximum top up of £1,300pa (£25 per week).
This can represent good value as the top-up is index-linked, backed by the government and provides a 50% entitlement to widows or widowers.
The deadline to take advantage of this option is the 5th April 2017 and will be a considered option for all our eligible clients before that date.
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