Those born too long ago to benefit from the more generous flat-rate pension beginning in April 2016 will be offered the chance to top-up their existing state pension by paying a lump sum upfront that is roughly half the cost of buying an equivalent annuity in the open market.
The Department for Work and Pensions announced on Wednesday the terms on which those who reach state pension age before the flat-rate pension becomes available can buy up to £25 per week – about £1,300 per year – of income that will rise annually with inflation. Each £1 of additional weekly income from the age of 65 requires an upfront lump sum of £890. Those who are older will pay less.
Ros Altmann, an independent pensions specialist, said: “Relative to the private annuity market, this seems a very good deal for many people. The price of buying these extra state pension rights has been set at about half the cost of buying an inflation-linked joint-life annuity in the open market.”
Those who purchase the additional income can also pass half of it to a surviving spouse if they die.
Ms Altmann calculates that the implied interest rate on the upfront lump sum is equivalent to an annuity rate of 5.8 per cent. The current implied interest rate in the annuities market is about 2.9 per cent.
Unveiling the terms for purchasing additional benefits, Steve Webb, pensions minister, said that the offer is particularly beneficial for those who had not had the opportunity to accrue entitlement to a full state pension (after 2016, a 35-year record of national insurance contributions will be required) or those who fell short of qualifying for a more generous pension simply because they were born too soon.
“This could be particularly beneficial to women and other groups such as self-employed people who have not done well under additional state pensions and have not previously been able to top these up,” Mr Webb said.
The DWP commissioned Ipsos/MORI to conduct an online poll about how the opportunity to purchase a higher state pension would be received and found that around a fifth of respondents were either “very” or “fairly” interested in taking up the offer.
The Office for Budget Responsibility concluded that as many as 26,000 people are likely to buy additional pension income.
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