State pension reform: Minister Steve Webb says pay £900 to buy an extra £1 a week state pension (up to £25) for life

27th January 2014


People coming up to retirement before April 2016 may be offered the chance to buy additional units that could upgrade their state pension by as much as £25 a week. The pensions minister Steve Webb has been promoting the planned introduction of a scheme to allow people to buy additional amounts of state pension, as reported in today’s Daily Mail.

The plan envisages pensioners being able to pay in between £900 to £22,500 or perhaps more to top up their state pension. Their weekly state pension will then increase by a £1 up to a cap of £25 for every £900 paid. The minister says the scheme is likely to benefit the self employed and women the most.

People will, of course, have to find the cash from somewhere but it is likely that buying a top up to the state pension should prove more generous that buying an annuity on the open market though of course those due to retire will have to examine the full details of the scheme to test the comparison.

Preliminary calculations by Hargreaves Lansdown head of pension research Tom McPhail suggest that it will represent a better deal than the average annuity.

In a note about the proposals, he says: “Reports today suggest that an extra £1 a week of class 3A state pension would cost £900 to buy. On the open market, an inflation linked single life annuity for a 65 year old currently costs £1,468 for each £1 a week of income. This suggests that the government may also be offering this new scheme on very generous terms”.

The scheme is different to the existing arrangement where pensioners are able to fill gaps in their state pension entitlement. Hargreaves Lansdown has also compared the two systems below and made some initial calculations around what the current scheme, the new scheme and indeed annuity rates too.

Hargreaves Lansdown’s calculations

Current scheme – buying Class 3 NI

Voluntary national Insurance contributions are paid by those who do not have sufficient qualifying years to qualify for the full basic state pension.  They also count towards Widowed Parent’s Allowance, Bereavement Payment and Bereavement Allowance.

Voluntary National Insurance contributions normally have to be paid before the end of the sixth tax year following the tax year to which the contribution relates.  The rates for Voluntary National Insurance contributions may be higher if the contribution is paid more than two tax years after the tax year to which it relates, potentially at the highest rate applying since that tax year.

New scheme – buying Class 3A NI (not yet introduced but flagged in the media today)

Those who reach state pension age before 6 April 2016 with an entitlement to a UK state pension will be able to make voluntary class 3A national insurance contributions from October 2015.  This facility will be available for a limited time, potentially less than two years.

Each class 3A voluntary contributions will increase entitlement to additional state pension, not basic state pension, by £1 a week.  It is expected that the increase will be capped at £25 a week.  The extra amount of additional state pension will be paid in the week following the day on which the additional contribution is paid.

Previously the government has claimed that this scheme will be set at an ‘actuarially’ fair rate based on the latest gender neutral life expectancy figures available to the ONS.  The cost will vary according to age; the older the age the lower the price.  Today’s reports suggest that this may not in fact be the case.

As class 3A voluntary contributions are both designed for those over state pension age and with a value which is dependent on life expectancy, the government will consider whether there should be a cooling off period.

McPhail adds: “The government is looking at some very interesting ideas to help pensioners to boost their state pension entitlement. Previously the government had been looking to limit any additional state liability to the risk of pensioners living too long (and therefore costing the state more money). These ideas suggest that there is a bit of a rethink going on, with the government willing to offer more generous state pension foundations, on top of which private pension savings can then be built. In principle the terms offered by the government for these additional state pension deals look very attractive.”

Watch more Mindful Money TV:  The state retirement age rise and how to plan for it




2 thoughts on “State pension reform: Minister Steve Webb says pay £900 to buy an extra £1 a week state pension (up to £25) for life”

  1. Noo 2 Economics says:

    Oh how quickly things change from this – to what is being discussed above.

    So a “good thing” of a 27% pa return becomes a “why bother” return of 5.7% pa – anyone fancy gambling they’ll live at least 18 years into retirement?

  2. kooc says:

    This looks superficially attractive. I agree re comment from Noo 2 below it certainly is a leap up in cost from previous suggested costs. The problem is that the cost of this for will for most people will come out of taxed income saved over many years. This contrasts with workers tax relief on earnings for pension contributions which reduce their pension costs. This government run by men do not understand the insult of this offer to women who are about to retire before 2016. How all this contrasts with MPs pensions RPI (not CPI like the state pension) indexed linked pension!!! What a shameful proposal Mr Steve Webb.

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