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10 May, 2014   |   By Helen Pridham, The Herald   |   Market News

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How to top-up your state pension pot by £25 a week

Helen explains that if you are due to reach retirement age before April 2016 when the new single tier state pension is introduced, the chances are you are feeling short-changed.  

The new flat rate pension will be around £150 a week, replacing the current basic state pension and state second pension (S2P). But many people who retire beforehand will get a lower state pension for the rest of their retirement.

Helen says that to appease this group, the Government has announced a new top-up option for the state pension, which will be open to anybody due to reach retirement age by 2016, including existing pensioners.

The new scheme will allow extra pension of up to £25 a week to be purchased with a lump sum, with the cost of each additional pound of pension depending on age.

A 65-year-old will have to pay £890 to get a £52 annual income. The maximum payment he can make is £22,250 to get an annual income of £1,300. The scheme will be open between October 2015 and April 2017

Helen quotes a number of financial advisers, most of whom say that the offer is generally a good one, but is subject to a number of caveats. 

Among them is our own David Trenner, technical director at Intelligent Pensions, who says: "I fear that some people will buy the extra pension who shouldn't because they would be better off keeping the cash available.

"Some will buy it who could get a better deal elsewhere. And others won't buy it even though they should."

David lists a number of issues that people need to take into consideration:

He points out that if you are in poor health you may get a better deal from investing the money in an impaired life annuity, although even this may not be a good idea if you have a very poor life expectancy. Other factors that can also boost ordinary annuity rates include your postcode, and whether you smoke or drink.

By adding to a state pension through the new scheme, you will also be creating an entitlement for a spouse. David points out: "If the partner is significantly younger and in good health the dependent's pension will be very attractive. But if they are older or in poor health it will not be." If you do not have a partner then no further payments will be made after your death.

It is also important to remember that extra state pension would be taxable. Therefore if you have other taxable income, it could tip you into a higher tax bracket.

David adds: "It is important to consider the rest of your finances. Ironically, for the people for whom the extra pension would matter most, it may not be such a great idea, especially if they only have a modest amount of capital. They would probably be better advised to keep it as rainy day money so they don't have to take out credit if something unexpected happens."

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