Should you top up your state pension?

As of Monday just gone, if you're of state pension age or you will be before 6 April next year, you can pay a lump sum to the government in exchange for a larger pension. The offer is open until 5 April 2017 and applies to pretty much everyone who will miss out on the upcoming flat-rate state pension. The scheme, known rather blandly as "Class 3A contributions", takes a bit of getting to grips with. As Ruth Emery writes in The Sunday Times, "you will have to resist the urge to withdraw to a darkened room with a glass of water to understand it". But it's worth doing so it could make a big difference to your retirement income.

The bare bones of the deal are as follows: men born before 6 April 1951 and women born before 6 April 1953 can make a one-off payment (which decreases with age) to get up to an extra £25 a week (£1,300 a year) paid on top of the state pension of £115. If you're aged 65 and want to purchase the maximum amount, it will cost you £22,250, but if you're 85, it will only cost you £9,850 you can find out exactly what you'd need to pay using the government's online calculator.

The payments are inflation-linked and, importantly, your spouse or civil partner will be entitled to half of the extra pension upon your death not a bad deal at all, when you consider how much those sorts of provision would cost you on the annuity market. In all, the Institute for Fiscal Studies reckons that "to buy a £1-a-week top-up to the state pension would cost £890 via the government scheme, but an insurance company would charge £1,720". The contribution is technically a "state second pension", so any money put in will also benefit from the 10.4% increase for every year you defer your claim.

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Lump-sum payments are the same for both sexes, so women stand to benefit more than men due to their longer life expectancy. Also remember that the income is taxable, so if you and a partner are considering the offer, it would be best for the person in the lowest tax bracket to take it up. And if you don't already have a full 30-year record of national insurance contributions, then you should top up via the standard Class 3 scheme, notes Michelle McGagh on Citywire.

The National Pensioners Convention has calculated that a 65-year-old who pays £890 for an extra £1 per week will have to live for more than 17 years before making money on the deal, which seems reasonable given ever-increasing lifespans, but clearly if your health is impaired, that's something to consider carefully. Once you pay in, you can't get the cash back, although there is a 90-day "cooling off" period.