Merryn's Blog

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

If you're reaching pensionable age, the government may be about to make you a very generous offer.

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.

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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).

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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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