Over half a million workers retiring before state pension age will have the opportunity to top up their State Pension at “bargain rates” in the coming five years, Royal London has claimed.
They do this by paying heavily-subsidised voluntary National Insurance contributions for the years between the date when they retire and the date when they reach state pension age. Hundreds of thousands of teachers, nurses, civil servants and local government workers could benefit from this opportunity to boost their pension at “bargain-basement” rates, the firm said.
The analysis has been undertaken to coincide with the publication of Royal London’s first Good with your Money guide, entitled Everything you ever wanted to know about topping up your State Pension. The guide covers both the new state pension and the options for existing pensioners to top up their state pension.
Under the new State Pension system, the full flat rate of £155.65 per week is paid to those who have made 35 years of full rate National Insurance Contributions (NICs). But those who were members of public sector pension schemes or the pension schemes of many large employers generally paid a reduced rate of NICs because their scheme was ‘contracted out’. These workers have a deduction made from their new State Pension which means that most will not receive the full new flat rate in the early years of the new system.
However, many of these workers still have a normal scheme pension age of 60 or at least can access their occupational pension before state pension age. This means they can have a gap of several years between when they retire and when they are entitled to draw a state pension. By paying voluntary or ‘Class 3’ NICs they can make up some of the shortfall in their state pension created by the years when they were contracted out.
Royal London said this is an attractive proposition because the rate of Class 3 contributions is heavily subsidised by the government. For example, a single year of Class 3 contributions can be bought for a lump sum of around £733. This will boost someone’s State Pension entitlement by around £230 per year for the rest of their life. This is similar to buying an index-linked annuity with an annuity rate of over 30% – more than 10 times the rate available in the market. Based on an illustrative 20-year retirement, a lump sum of £733 generates £4,600 in extra State Pension over the course of retirement. Someone who filled five ‘missing’ years in their NIC record could receive an extra £23,000 in pension for an outlay of under £4,000.
This option is particularly relevant for many public sector workers such as teachers, nurses and civil servants who are entitled to draw their occupational pension at 60 but will not get a State Pension until they are 65 or 66. If they retire 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 and generate a substantial return.
Based on analysis of the annual reports of the largest public sector pension schemes (Local Government, NHS, Teachers, Civil Service, Armed Forces, Police and Firefighters) Royal London estimates that over half a million public sector workers could be in a position to benefit over the next five years, as well as many thousands of former private sector workers whose company pension scheme allowed them to draw a pension before State Pension age.
Steve Webb, director of policy at Royal London, said: “Large numbers of workers could gain a substantial boost to their State Pension for the payment of a relatively modest lump sum. But the rules around topping up State Pensions are complex so we hope that our new guide will help people to navigate the system.
“It is rare for the government to offer something on such generous financial terms and we want to make sure that everyone knows how to take advantage of this opportunity.”