The best investment in the UK – topping up your state pension

There has always been something a bit odd about the price of topping up a state pension. We have written before about the fabulous returns involved in deferring taking your public payment. But unveiled in the Autumn Statement was another exceptionally cheap way to get more.

It seems, says Dan Hyde in The Telegraph, that those who have failed to build up any additional state pension entitlement (ie, above the basic £110.15 a week) and who reach pensionable age by April 2016, will now find that it costs very little to buy a little extra.

The details on this haven’t been confirmed yet, but it seems that you will be able to pay around £700 in a lump sum to buy an entitlement to an extra £190 a year. That makes the payback time just over three years.

You can get a similar payback time if you buy National Insurance credits to build up a basic state pension, but you just won’t see it anywhere else  – not even if you chuck all your money into state subsidised wind turbines (you need to leave a good six to seven years for this).

To see just how generous a deal it might be, look at it relative to how much £700 would buy you if you had to get an annuity instead. The answer is £24. The state (or taxpayer) is nearly eight times as generous as the market.

So, here’s the point. It looks like there is going to be a window for anyone near state pension age to top up their retirement income on the cheap. If so, they should probably do it.

There is bound to be a cap on just how much you can buy at this ridiculously cheap price, but note that it is possible at the moment  for some people (mostly men who have been high earners in the past) to get a state pension of up to £270 a week in total.

If you have the cash to spare and the offer turns out to be a good as rumoured, this could be a pretty good way for everyone else in the right age group to aim for the same.

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12 Responses

  1. 12/12/2013, Cleverwithmoney wrote

    As ever, the devil will be in the detail but at 1st glance it looks like a good deal and a really great way of investing part of the tax-free cash from a personal/company pension scheme.

  2. 12/12/2013, marquis wrote

    This article from Citywire suggests this particular top-up route won’t be subsidised, but I guess we’ll have to wait and see.

  3. 12/12/2013, charlesdb wrote

    A great deal, unlesss you die first. A bird in the hand…..

  4. 12/12/2013, Sevo wrote

    What?! What about previous MW comments that a pension is just an IOU? You have told us all to avoid government bonds because the government is broke and won’t repay. You think the government will honour pensions in face of socioeconomic collapse?! (which you are adamant will happen and have been predicating for over a year). Buy gold, sell gold but don’t sell it all, don’t buy bonds, but top up your state pension. Consistency please.

  5. 12/12/2013, Changing Man wrote

    And who will be paying for this latest example of state largesse? Not “those who have failed to build up any additional state pension entitlement” who will benefit, but those who continue to pay NI contributions, month in, month out, year in, year out, who won’t!
    I expect few Money Week readers will be in the group that would qualify for this “leg-up”? I understand from a recent OECD report that the UK has the second-worst state pension system in the developed world, with only Mexico providing a less generous retirement income!
    Much more radical thinking is required to ensure that national insurance contributions are set at an appropriate higher level to fund a higher % of lifetime earnings in retirement. Those that aren’t prepared to work and fund a higher state pension should not be subsidised by those that are.

  6. 12/12/2013, Tyler Durden wrote

    ….and you’re trusting a government to get something back with this ‘investment’, yes?

    The penny doesn’t seem to be dropping.

  7. 13/12/2013, Merryn wrote

    @sevo I entirely agree that in the main it isn’t a good idea to rely on the government to pay what it promises. Far from it. But in this case the payback time is so short (and it is apparently to be inflation linked) so I would say that the chances of at worst getting back the real value of your money and at best making a v nice long term return are pretty good.

  8. 14/12/2013, Sevo wrote

    Thank you for the reply.
    With regret, as a public sector worker currently (almost) 40 yrs from retirement I will not benefit! I fully expect retirement age will be increased again in my lifetime and I fully expect my pension pot to be raided again as indeed it recently has. I think I shall focus my efforts outside of government schemes.

  9. 15/12/2013, Tantalaja wrote

    On a pragmatic point, is there a date when are the details due to be confirmed?

  10. 16/12/2013, marquis wrote

    Steve Webb, the pensions minister, was on Money Box this weekend and said it was likely to be early 2014, once the latest mortality data from the Government Actuary Dept has been assessed.

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