IN this article I will look at two pieces of legislation that may affect those in or approaching retirement.
The first relates to the newly unveiled opportunity for pensioners to top up their regular state pension income with a lump sum investment. The second then relates to the changes to pension legislation that will take effect from April 2016 and how these may affect individuals, especially those with final salary pension schemes.
1. New top-up to state pension opportunity – Class 3 A contributions
Under a recently introduced scheme, more than seven million Britons are now being offered the chance to top up their state pensions. Men over the age of 65 and women over the age of 63 can get up to £25 a week extra on their state pension, in return for a oneoff payment.
How much they have to pay will depend on their exact age; the older they get, the lower the cost.
The offer is open to existing pensioners and anyone who will reach state pension age before April 2016. After that date the new, often more generous, single-tier pension will kick in.
In order to qualify for the pension top-up scheme, you must be entitled to the basic State Pension or Additional State Pension and be either:
- a man born before 6th April 1951
- a woman born before 6th April 1953
However, if you already have gaps in your National Insurance record, it may be more cost-effective to make voluntary contributions first.
The current basic state pension is worth up to £115 .95. The new flatrate pension will be worth up to £155 a week to those who qualify.
The new top-up scheme, known as Class 3A contributions, will provide an income that will rise with inflation. In addition, spouses or civil partners will be able to inherit at least half of that income when the pensioner dies.
About seven million people are currently of pensionable age, according to the Pensions Policy Institute (PPI), and are therefore eligible to take part. But the Department for Work and Pensions (DWP) concedes that it will not be suitable for everyone, and only expects around 265,000 to take up the offer.
“It won’t be right for everybody and it’s important to seek guidance or advice to check if it’s the right option for you,” said Pensions Minister, Baroness Altmann.
“But it could be particularly attractive for those who haven’t had the chance to build significant amounts of state pension, particularly many women and people who have been selfemployed.”
Under the Class 3A scheme, the maximum extra income possible will be £1,300 a year, or £25 a week. The younger someone’s age, the more they will pay for a given level of income given their longer life expectancy.
So someone aged 65 who wants an extra income of £10 a week would have to pay a lump sum of £8,900. But at the age of 75 they would only have to pay £6,740.
Those wanting to apply will now have 18 months to do so. However, unlike the recently introduced (and exceedingly popular) pensioner bonds, there is no limited pot of money, so the DWP said there was no need to rush to apply.
If you wish to apply then you can do so online at the following governmental website: https://www.gov.uk/statepensiontopup. You can also apply over the phone.
The State Pension top-up contact number is 0345 600 4270. To assist in your application you will need the following:
- proof of your identity, e.g. your P60 or the last four digits of your bank account
- your National Insurance number (if you know it)
If you do sign up for an increased pension benefit then there’s a 90-day “cooling off ” period which will allow you to get a refund if you change your mind.
With regards to death benefits on the additional contribution amount:
- The contribution (minus any top-up income payments already claimed) will be refunded to your estate if you die within 90 days of topping up.
- If you die after 90 days, your contribution will only be refunded to your estate if you deferred taking your State Pension.
2. Additional pension news that may affect those approaching retirement
My second update focuses on a couple of imminent changes in pension legislation that may require action in the short-term to avoid the regulations having an adverse effect on you that causes more tax or charges than is strictly necessary.
Firstly, the Pension Lifetime Allowance is reducing from £1.25 million to £1 million in April 2016, and although many people may feel they are nowhere near this level, if you have any defined benefit schemes (final salary schemes) in place – whether current, deferred or in payment – they may seriously affect the position.
Therefore, if you have any final salary schemes in existence at all it would be sensible to ensure that these benefits do not give rise to a tax charge that is potentially easily avoided.
If you have any such schemes, you should provide up-to-date details to your professional adviser so they can check this situation for you.
Secondly, and also from April next year, high earners will have their annual allowance cut to £10,000 from £40,000.
This is the amount that can be paid into a pension for an individual in any tax year without incurring punitive tax charges.
The calculation for “income” in this scenario is complex, so I would recommend that if you are likely to have income (from all sources) in excess of £110,000 in a tax year and your anticipated pension input for the tax year could be in excess of £10,000, then you should seek advice in the very short-term to ensure you are fully conversant with the changes and to check if there is anything that can be arranged to avoid the tax charges for excess contributions.
