The big pension giveaways

It’s not often the government will give you something at a knockdown price, but in fact it’s currently offering two excellent and relatively unknown deals to enhance your state pension

Postpone your pension

One is available if you delay taking your state pension. In compensation the government will reimburse the payments you missed at advantageous rates, either as additional income subsequently added to your state pension or as a lump sum

Provided you put off claiming your state pension for at least five weeks, the government will increase it by 1% for every five weeks you delay. This equates to 10.4% for every full year you delay claiming, or an extra £1.40 a week for every £10 of your state pension

For example, if you’re entitled to the full payout of £110.15 per week, your basic state pension will be £5,727.80 a year. By deferring for one year you’ll get an extra £595 (10.4% of £5,727.80). For two years’ delay you would receive an additional 20.8%, or £1,191.38, and so on

At a time when the best regular savings accounts are paying 3.25%, this appears an excellent deal and a good way to bolster your income. However, bear in mind that you would need to survive almost 10 years per year of delayed pension just to recoup the money not received during that year

This boost to your income is therefore worth more the longer you live. According to the latest government statistics, the average life expectancy for people aged 65 is around 19 years for men and 21.6 years for women living in southern England. However, remember these are averages – there’s a 50% chance you’ll live beyond this estimate

You’re allowed to delay taking your state pension for as long as you wish. Once you do start claiming, any extra accrued will usually increase in line with the annual increases in pensions set by the government each year. Currently they’re guaranteed to increase every year by the highest of inflation, average earnings or 2.5% – ‘the triple lock’ introduced by the coalition in 2010. The magic of compounding means this could grow sizeably over several years

You can also take advantage of this deal if you are already receiving your state pension and decide to stop claiming it for a while, but you can only start and stop once

If you delay for a whole year, then you also have the choice of taking a lump sum payment of the postponed pension instead of increased income; the government will pay interest of 2% above the Bank of England base rate on that lump sum

With interest rates at their current low levels, this isn’t so remarkable in itself, but it may suit some people who for instance might be taken into a different tax bracket if they take their state pension, perhaps if they’re still working after state retirement age. Any lump sum will be taxed at the highest tax rate that applies to your other income at the time it is taken

You might think that the reason the terms for delaying your state pension are so generous is because, by the law of averages, a few people who take this option will die while they are delaying, therefore costing the government nothing. In fact, in the event of your death, the government will pay the amount of state pension foregone to your surviving spouse or partner or into your estate

This has one important restriction, however - if you’re male (i.e. a widower or civil partner) you must be over state pension age at the time your wife or civil partner dies. Otherwise, your widower or civil partner may claim up to three months of your deferred state pension

If you’re unmarried your estate may similarly claim up to three months. Naturally, the government will not allow you to manipulate the benefits system, so to protect the Treasury you can’t delay your state pension to claim other benefits such as pension credit or housing benefit. If you do, this will be taken into account when working out your state pension uplift

You must also be living in the UK to qualify for postponement. If you want to delay your state pension, all you have to do is not claim it and it will automatically be deferred. If you’re already in receipt of it and want to stop claiming, you should contact your pension centre (gov.uk/find-pension-centre)

Top up your national insurance contributions (NICs)

Under the government’s new rules, which come into effect in 2016, people will need to build up a thumping 35-year national insurance record to be entitled to a full state pension. This is a considerable hike on the 30 years currently required, and for some people, particularly women, the full number of years may be hard to make up. However, if you’ve got gaps in your NI record, you can make voluntary Class 3 payments (a special type specifically for topping up any shortfalls) at very advantageous rates

Payment for previous years is payable at the current rate, which is £13.25 per week, or £689 per year. The full state pension from 2016, when the new rules are scheduled to take effect, is likely to be £144 per week, or £7,488 per year. On that basis, each year of contributions is worth £213.94 (the state pension divided by 35), so the break even point on a one-off payment of £689, at which you effectively receive back the value of your additional payment, is 3.2 years of pension. After that, it is all profit

Traditionally, periods of caring responsibilities such as looking after children or an elderly relative have counted as additional years in calculating NI records, but these concessions have also been whittled down over the years. For example, the former Homes Responsibilities Protection used to provide automatic credits for the care of children under the age of 16, but in April 2010 that was cut back to apply only to children under the age of 12

Furthermore, NI records can be hard to calculate. It may be helpful to know that so long as you’ve paid sufficient NICs in one year, you do not have to be working for the full tax year to qualify. You may also be pleasantly surprised to discover that you automatically receive three years’ contributions for the years you turned 16, 17 and 18. The best thing to do is to obtain a personal statement from HMRC (hmrc.gov.uk/ni/intro/check-record.htm)

Topping up your NIC gap must normally be done within six years of the end of the tax year for which the contributions are being paid. For example, if you want to pay for the 2007/08 tax year, then you must pay by 5 April 2014. You can do this even if you’ve already reached state pension age

Single-tier pension

However, the government recently granted more time to people who might be adversely affected by the new 35-year rule because they’re due to retire when the single-tier pension is introduced in 2016; these people can pay voluntary NICs for the years 2006/07 to 2015/16 at any time up to 5 April 2023. Furthermore, for the tax years 2006/07 to 2010/11, any payment made by 5 April 2019 will be at the rate applicable in the 2012/13 tax year; and for the remaining years up to and including 2015/16, higher-rate provisions will not apply until 5 April 2019

Those reaching state pension age sooner - by 5 April 2015 - may also be able to pay voluntary Class 3 contributions for up to an additional six years on top of the standard six years, going back to 1975/76 to make up any gaps in their NIC record, but they must already have 20 qualifying years of NICs (including full years of credits)

People wedged in the middle, who will reach state pension age between 6 April 2015 and 5 April 2016, can also pay voluntary NICs to increase their basic state pension, but no special arrangements apply. If you’re self-employed or living abroad, you can pay Class 2 contributions instead. These are cheaper, at the flat rate of £2.70 a week

Both deals have in fact been offered for many years, but it’s only as life expectancy has risen that they have become such good value. The government moves at a snail’s pace, but is sure to revise the schemes at some stage, so there is an element of buying while stocks last.

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