Around half a million public & private sector workers can massively boost their state pensions. Here’s how
Put £700 in and get £5,000 out. That’s the deal potentially on offer to thousands of current and former public sector workers who can top up their state pension at “bargain basement” rates.
He estimates that more than 500,000 older people – including many current and newly retired teachers, nurses, civil servants and local government workers – could benefit over the next five years, as well as thousands of private sector workers. This particularly relates to those entitled to draw their occupational pension at 60, but who won’t receive a state pension until they are 65 or 66.
In simple terms, they can potentially cash in by paying heavily subsidised voluntary national insurance contributions for the years between the date when they retire and when they reach state pension age.
Of course, you have to have money to be able to afford it. And not everyone will warm to the idea of using today’s cash to buy an income for later when they do not know how long they might live.
The deal is linked to the introduction of the flat-rate state pension for everyone reaching state pension age on or after 6 April 2016. The full amount, currently £155.65 a week, is paid to those who have made 35 “qualifying years” of national insurance contributions (NICs).
Paying voluntary NICs is an attractive proposition because the rate is heavily subsidised by the government.
However the vast majority of people who belonged to a public sector pension generally paid national insurance at a lower rate because their scheme was “contracted out”. To reflect this, they will have a deduction made from their state pension – which means that most won’t receive the full amount in the early years. But the good news is that by paying voluntary or “class 3” NICs they can make up some of the shortfall.
It is an attractive proposition because the rate is heavily subsidised by the government.
For example, a single year of contributions can be bought for a lump sum of around £733. This will boost someone’s state pension entitlement by around £230 a year for the rest of their life. That £733 would generate a pretty impressive £4,600 over the course of a 20-year retirement. Someone who bought 5 “missing” years could receive an extra £23,000 for an outlay of less than £4,000. £19,000 free money!
This is particularly relevant for many longer-serving teachers, nurses and civil servants etc who are entitled to draw their occupational pension at 60, then face a gap of five or six years before they can receive their state pension. For example, under the rules of the teachers’ pension scheme, those who entered pensionable service before 2007 have a final salary “normal pension age” of 60, while for more recent arrivals it is 65.
Similarly, most members of the “1995 section” of the NHS scheme have a normal pension age of 60 (some nurses, midwives and others have special terms which mean theirs is 55), while members of the “2008 section” must wait until 65. Likewise, members of the classic, classic plus and premium part of the civil service scheme typically have a normal pension age of 60, but for those who joined on or after 30 July 2007 it is typically 65-plus. The 4.6 million member-strong local government pension scheme’s normal pension age is higher at 65, but it is thought that most people take early retirement.
If someone in this situation retires at 60, they would not normally pay any further NICs between retirement and state pension age, but they can pay voluntary contributions for each of those years.
The way the new top-up scheme works is best illustrated with an example, so here is one very closely based on a real person. Georgina was a teacher and retired on her 60th birthday on 6 April, which means she gets the new flat-rate state pension. She can draw her teacher’s pension at 60 but won’t get her state pension until she is 66. She doesn’t intend to work again, and so each of the years from 2016-17 to 2021-22 will have a gap in her national insurance record.
Because she was a member of the teachers’ scheme for most of her working life, Georgina has only built up a small Serps pension of £10 a week on top of her state pension entitlement of £119.30 (she hasn’t made the full 35 years of contributions), making a total of £129.30. Georgina decides she can afford to set aside a lump sum of £733, which will pay for one year of voluntary NICs. As a result her starting amount is increased by 1/35 of the full flat-rate pension, or £4.45 a week, taking her total state pension to £133.75.
The Office for National Statistics estimates that a 60-year-old woman will on average live until she is 88, which in Georgina’s case would mean receiving a state pension for 22 years. An extra £4.45 a week, multiplied by 52 weeks, multiplied by 22 years, means an extra £5,090 – for a lump sum of £733. And if Georgina has more spare cash she can potentially repeat the exercise for each gap in her NI record.
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