New UK State Pension

Old Oct 15th 2014, 4:04 pm
  #16  
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Default Re: New UK State Pension

from the GOV.UK website - for those already receiving state pension (or about to) when the 'new' formula comes into effect & would have a shortfall on NIC's, the DWP is allowing those from October 2015 to pay an additional 5 years of voluntary 'Class 3A' NIC top up's to get someone from the now max of 30 to 35 years. Is it really worth it?

You decide

https://www.gov.uk/government/upload...ion-top-up.pdf

"As an illustration, the contribution required for an extra £1 pension per week for a person aged 65 is £890. This means that for £4,450, the individual could receive an additional £260 per year for life, increased in line with prices and inheritable on death in the same way as existing additional State Pension: with a minimum of 50% for the surviving spouse or civil partner. For a 70 year old the rate reduces to £779 and at age 75 the rate is £674. I will be laying the rates at which pensioners can buy Class 3A voluntary"

Last edited by not2old; Oct 15th 2014 at 4:57 pm.
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Old Oct 15th 2014, 5:49 pm
  #17  
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Default Re: New UK State Pension

Originally Posted by not2old
from the GOV.UK website - for those already receiving state pension (or about to) when the 'new' formula comes into effect & would have a shortfall on NIC's, the DWP is allowing those from October 2015 to pay an additional 5 years of voluntary 'Class 3A' NIC top up's to get someone from the now max of 30 to 35 years. Is it really worth it?

You decide

https://www.gov.uk/government/upload...ion-top-up.pdf

"As an illustration, the contribution required for an extra £1 pension per week for a person aged 65 is £890. This means that for £4,450, the individual could receive an additional £260 per year for life, increased in line with prices and inheritable on death in the same way as existing additional State Pension: with a minimum of 50% for the surviving spouse or civil partner. For a 70 year old the rate reduces to £779 and at age 75 the rate is £674. I will be laying the rates at which pensioners can buy Class 3A voluntary"
That is analogous to buying an index-linked annuity at a rate of 5.8% (£52 per year for an outlay of £890), because state pensions will increase with inflation.

Current commercial annuity rates are 5.8% for a flat-rate (non-increasing) annuity and about 3.3% for an index-linked annuity. So, compared to market annuity rates it is pretty good.

Last edited by dunroving; Oct 15th 2014 at 6:07 pm. Reason: Corrected 3.3% for index-linked annuity
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Old Oct 15th 2014, 6:04 pm
  #18  
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Default Re: New UK State Pension

not2old, thanks for the heads up on this. I've printed off that two page explanation you linked to. I'll definitely seriously consider this.

I'm eligible, since I get to pension age about six months before the stated deadline. Slightly different topic; I will only have 29, not 30, years in the bag when I reach pension age. (I've been paying class 2 NICs but started a bit too late to get to 30 by age 65.). Did I read somewhere that there is a way of paying to qualify for years in the past where there was only a fractional contribution at the time, not enough to make it a qualifying year?
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Old Oct 15th 2014, 6:13 pm
  #19  
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Default Re: New UK State Pension

Originally Posted by robin1234
Did I read somewhere that there is a way of paying to qualify for years in the past where there was only a fractional contribution at the time, not enough to make it a qualifying year?
This was discussed previously & I can state it happened too me where I received a pay notice to pay class 2 in the year that I turned 65 prior to April 5. I paid & the money was returned as an error. Phone call to DWP, "explained that no contributions in the year one turns 65"

I believe fractional years prior to do count, at least for me, I sat down to figure the number of contribution years before paying past year top up's & ongoing class 2's till I turned 64 & it seems for the partial year I was given a full year credit. It may have changed?

As for the open window for voluntary 5-year top-up class 3A's , on a straight payback its ~17 years, not taking into account yearly increases.
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Old Oct 15th 2014, 6:16 pm
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Default Re: New UK State Pension

I suggest you think again. The deal looks good until you compare it with the alternative of deferring the pension. That increases the pension by 10.4% per annum. Steve Webb, the pensions minister, has already indicated that the right will remain for all those who reach retirement age before October '16. The increase given by deferring pension is also index linked, so it looks a better deal than Class 3a.
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Old Oct 15th 2014, 6:41 pm
  #21  
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Default Re: New UK State Pension

Originally Posted by dunroving
That is analogous to buying an index-linked annuity at a rate of 5.8% (£52 per year for an outlay of £890), because state pensions will increase with inflation.

Current commercial annuity rates are 5.8% for a flat-rate (non-increasing) annuity and about 3.3% for an index-linked annuity. So, compared to market annuity rates it is pretty good.
I take a different approach, as a single person with no spouse

That the outlay of £890 with a return of (pay myself back) £52 per year, is just over 17 years to get back what I put in. Since I live in a country where UK state pensions are not indexed, then 17 years on + 65, I'll be 82. If I die in between - I lose

In Canada I can buy a quality chartered bank preferred shares paying 5%/annum (over four quarterly payments 1.25%/qtr). Since I have doing this for the past 20 odd years I have never had an issue with my investment at $25/preferred share returned to me on the termination date, usually 5 years after the issue date. The other part of that is they trade on the stock exchange, so I can pick & choose to cash out at any time
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Old Oct 15th 2014, 6:48 pm
  #22  
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Default Re: New UK State Pension

Originally Posted by not2old
from the GOV.UK website - for those already receiving state pension (or about to) when the 'new' formula comes into effect & would have a shortfall on NIC's, the DWP is allowing those from October 2015 to pay an additional 5 years of voluntary 'Class 3A' NIC top up's to get someone from the now max of 30 to 35 years. Is it really worth it?

You decide

https://www.gov.uk/government/upload...ion-top-up.pdf

"As an illustration, the contribution required for an extra £1 pension per week for a person aged 65 is £890. This means that for £4,450, the individual could receive an additional £260 per year for life, increased in line with prices and inheritable on death in the same way as existing additional State Pension: with a minimum of 50% for the surviving spouse or civil partner. For a 70 year old the rate reduces to £779 and at age 75 the rate is £674. I will be laying the rates at which pensioners can buy Class 3A voluntary"
This isn't quite correct. The class 3a does not enable people who retire before the flat rate pension comes into force to claim the new flat rate pension. It just gives them additional state pension on top of their old style pension.

In my opinion, as I stated above, if you are in that position (as I am) you are better off deferring your pension because the rate of return is better.
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Old Oct 15th 2014, 6:54 pm
  #23  
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Default Re: New UK State Pension

Originally Posted by Editha

In my opinion, as I stated above, if you are in that position (as I am) you are better off deferring your pension because the rate of return is better.
agree, however the only issue with that is the one shot tax grab on a lump sum.

If you defer to get the extra pension, per wk say after 5 years, again (income tax on the extra) and its a matter of 'how long will you collect it' (years left to live) & the catch up of what you would have collected in the 5 years prior to use or invest.

Whatever works best for each persons circumstances

Related articles

http://www.moneysavingexpert.com/sav...pensions#delay

http://www.litrg.org.uk/tax-guides/p...nsion-deferral

Last edited by not2old; Oct 15th 2014 at 7:17 pm.
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Old Oct 15th 2014, 7:31 pm
  #24  
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Default Re: New UK State Pension

Originally Posted by not2old
I take a different approach, as a single person with no spouse

That the outlay of £890 with a return of (pay myself back) £52 per year, is just over 17 years to get back what I put in. Since I live in a country where UK state pensions are not indexed, then 17 years on + 65, I'll be 82. If I die in between - I lose

In Canada I can buy a quality chartered bank preferred shares paying 5%/annum (over four quarterly payments 1.25%/qtr). Since I have doing this for the past 20 odd years I have never had an issue with my investment at $25/preferred share returned to me on the termination date, usually 5 years after the issue date. The other part of that is they trade on the stock exchange, so I can pick & choose to cash out at any time
Yes, if you plan to retire in Canada then it would be roughly equivalent to current market rates for a standard annuity.
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Old Oct 15th 2014, 7:33 pm
  #25  
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Default Re: New UK State Pension

Originally Posted by Editha

In my opinion, as I stated above, if you are in that position (as I am) you are better off deferring your pension because the rate of return is better.
Maybe I'm not thinking straight here. Couldn't one do both? Pay the one time investment for Class 3a NICs and defer a couple of years? Wouldn't the increased pension also benefit from the preferential deferral increase too?
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Old Oct 15th 2014, 7:42 pm
  #26  
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Default Re: New UK State Pension

Originally Posted by dunroving
Yes, if you plan to retire in Canada then it would be roughly equivalent to current market rates for a standard annuity.
did you calculate the payback of the invested £890 based on a set 2.5% yearly pension increase on being paid back the (£1/wk) £52/yr?

Capital is tied up until its returned to you as return of capital in full, then and only the do you get a profit on the investment

Maybe its just my mindset, that an £890 invested even at 5% compounded with guarantee of capital is better IMO than the £890 into class 3A NIC's?
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Old Oct 15th 2014, 7:50 pm
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Default Re: New UK State Pension

Originally Posted by not2old
did you calculate the payback of the invested £890 based on a set 2.5% yearly pension increase on being paid back the (£1/wk) £52/yr?

Capital is tied up until its returned to you as return of capital in full, then and only the do you get a profit on the investment

Maybe its just my mindset, that an £890 invested even at 5% compounded with guarantee of capital is better IMO than the £890 into class 3A NIC's?
Quite possibly - I was just comparing to a standard UK market annuity.The current flat rate annuity you would get for £100k would be about £5.8k per year, or 5.8% As you say, there are other things you could do with £100k in retirement.

Of course if we knew how long we'd last the decisions would be easier.
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Old Oct 15th 2014, 8:07 pm
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Default Re: New UK State Pension

Originally Posted by dunroving
Quite possibly - I was just comparing to a standard UK market annuity.The current flat rate annuity you would get for £100k would be about £5.8k per year, or 5.8% As you say, there are other things you could do with £100k in retirement.

Of course if we knew how long we'd last the decisions would be easier.


even living in the UK....

the £890 into class 3A NIC's is sunk money, the payback is not quite an annuity, the 2.5% inflation rate is on the £52/yr. On the basis the 2.5% pension increase is a wash to inflation, then you are no further ahead sinking the £890 into NIC's because the residual value could be zero.

With the £890 invested at 5% (not in clas 2A NIC's) with preservation of capital - me thinks I would be ahead of the game not going the class 3A's?
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Old Oct 15th 2014, 8:10 pm
  #29  
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Default Re: New UK State Pension

Originally Posted by not2old
did you calculate the payback of the invested £890 based on a set 2.5% yearly pension increase on being paid back the (£1/wk) £52/yr?

Capital is tied up until its returned to you as return of capital in full, then and only the do you get a profit on the investment

Maybe its just my mindset, that an £890 invested even at 5% compounded with guarantee of capital is better IMO than the £890 into class 3A NIC's?
I'm not sure where you'd find a 5% return with a guarantee on your capital today.

Contributing to an annuity or the state pension plan have an insurance aspect to them and if you live longer than you actuarial expectancy....an many people obviously do because some die early.......you'll be glad you made those payments. You also avoid market volatility.

IMHO you should cover your basic expenses with annuities and state and workplace pensions, if they are index linked so much the better. Once you have those in place then look at other income sources.

Personally, I'm very happy that I decided to pay voluntary NI 30 years ago when everyone was telling me that it was a waste of money and asking why would I pay US FICA tax as well as NI. My last payment was my 31st voluntary NI contribution.....only 4 more to go.
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Old Oct 15th 2014, 8:55 pm
  #30  
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Default Re: New UK State Pension

Sorry, but I still don't see it.

So, suppose I have £4,450 in savings and I am retiring at 65.

Using the 3a option I pay £4,450 in contributions and claim my pension immediately. My pension is the full state pension (currently £5881) plus £260 that I've bought with the 3a contributions: a total of £6141.

On the other hand, the £4,450 would be the pro rata equivalent of the pension of £6141 for nine months. Deferring the pension for nine months would give me an uplift of £458 per annum.

So, even if I have an immediate need for income, if I just use the £4450 to keep myself for nine months, to enable me to defer claiming the state pension, then I'm still better off than paying class 3a.

It may be that the calculation for older age groups makes more sense of paying for 3a, but I don't see it for those of us who are under 65 now.
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