The government has announced that, under a new scheme, hundreds of thousands of people over 61 will be able to get higher pensions by topping up their contributions.
Currently, anyone who is due to retire before April 2016 is in danger of missing out on the new higher state pension, which by then will be £144 a week. The new rules aim to help this group of people by allowing them to boost their state pension by up to £25 a week.
The new scheme involves those who are nearing retirement paying a voluntary lump sum through National Insurance. The amount will depend on their exact age, and factor in life expectancy. The government expects around 265,000 people to take advantage of the new rules, which will apply to men born before 6 April 1951 and women born before 6 April 1953.
According to the calculator on the government’s website, someone who is now 65 would have to pay a total of £890 to add an extra £1 a week onto their pension. A 71 year old would have to pay a total of £674 to get the same amount. Payments will be collected through a new form of voluntary National Insurance contribution called Class 3A.
Announcing the scheme, pensions minister Steve Webb said:
“This is another bold action in how we build a stronger economy through choice in retirement income. The scheme will give them a guaranteed, index-linked return and will be particularly attractive for women pensioners who will draw the higher pension for longer.
“It will also help the self-employed, who currently qualify for only the basic state pension.”
However, the new option may not be the best choice for everyone. Laith Khalaf, head of corporate research at Hargreaves Lansdown, warned that as the extra income will be subject to Income Tax, “some savers should pause to consider whether an Isa may be a better, more flexible home for their money”.