Fewer than 4,000 people have taken advantage of the government’s state pension top-up scheme despite being able to significantly boost their retirement income through the offer, figures show.
Old Mutual Wealth said 3,848 people have taken advantage of the scheme in its first six months of operation but the take-up rate fell short of government expectations.
The scheme gives people the chance to make Class 3A voluntary National Insurance contributions to boost their state pension entitlement. It started in October last year and ends in April 2017.
Old Mutual got the information through a Freedom of Information request made to the Department for Work and Pensions. It said low take-up rates pointed to a lack of public understanding.
Pension technical expert Jon Greer (pictured) said: “Voluntary state pension top-ups represent a good deal, giving savers access to a guaranteed income at a reasonable rate of return, with inflation protection and spousal benefits.
“In the first quarter of 2016 alone, 21,200 annuities were sold in the UK. Many of the customers that purchased those products will have been eligible to top-up their state pension at a better rate.
“Unfortunately, few people seem to have been aware of the option, perhaps because of the confusing ‘Class 3A’ label, or the distraction of high-profile pensioner bonds and pension freedom reforms also introduced last year.”
He added that while state pension top-ups would not be right for everyone they should be considered as part of a retirement income plan.
“In particular, those who want a guaranteed income, or who are not entitled to the full state pension, should give serious consideration to state pension top-ups,” said Greer.
Expectations
Old Mutual said the government originally thought eligible individuals would spend more than £800m purchasing additional state pension income (£435m in 2015/16 and 2016/17).
However, it said savers committed just over £64m to the scheme (up to April this year).
It said this is despite the fact that rates available on additional state pension income are “typically favourable when compared with the equivalent rate available through annuity providers”.
The firm explained a 65-year-old can purchase an additional £1 of state pension income per week at a cost of £890. At £52 per annum, this reflects a rate of 5.84%.
A 75-year-old can access an extra £1 per week (£52 per year) for £674, a rate of 7.2%.
Voluntary state pension top-ups offer 50% spousal benefit and will grow with inflation.
Old Mutual said this meant the terms available are comparable with an index-linked, joint-life annuity available on the private market, but at better rates.
Comparable annuity products are currently offering about 2.7%, it said.
The data from the DWP shows that among the 3,848 people to have taken advantage of the scheme and the average amount of additional pension purchased stands at £21 per week, costing £16,500.
Greer added: “Taking control of retirement income decisions can be challenging and there are numerous options available. This includes topping up your state pension or deferring the state pension, which for some people could offer an even better rate of return, as well as a wide array of annuities and income drawdown solutions available through the private sector.
“Finding a sustainable retirement income strategy that meets your needs is a complex process and it is best to speak to a financial adviser for professional help putting together the right plan.”
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