Half a million workers retiring before state pension age will have the chance to top up their state pension at “bargain-basement rates” over the next five years, according to Royal London.
The group says this can be achieved by paying heavily-subsidised voluntary National Insurance contributions for the years between the date a person retires and the date they reach state pension age.
Under the new State Pension system, the full flat rate of £155.65 per week is paid to those who have made 35 years of full-rate National Insurance Contributions (NICs). Those who were members of public sector pensions schemes or the schemes of many large employers, however, generally paid a reduced rate of NICs because their scheme was ‘contracted out.’
Royal London policy director Steve Webb said: “These workers have a deduction made from their new State Pension, which means most will not receive the full new flat rate in the early years of the new system.
“However, many of these workers still have a normal scheme pension age of 60 or at least can access their occupational pension before state pension age. This means they can have a gap of several years between when they retire and when they are entitled to draw a state pension.
“By paying voluntary or ‘Class 3′ NICs, they can make up some of the shortfall in their state pension created by the years when they were contracted out. Hundreds of thousands of teachers, nurses, civil servants and local government workers could benefit from this opportunity to boost their pension at bargain-basement rates.”
The scheme may not, however, automatically provide relief to everyone who has not paid enough NICs. Aegon pension director Steven Cameron said: “Despite claims the new state pension is simpler, most people won’t receive the full amount and for many, this will come as an unpleasant surprise.
“Paying voluntary NICs is one way of addressing this and could be very worthwhile for those who can afford it. For others, the key will be how to bridge the income gap between stopping work and claiming their state pension. Here, private sector pensions score strongly on flexibility grounds.”
Based on an analysis of the annual reports of the largest public sector pensions schemes, Royal London estimates more than half a million public sector workers could be in a position to benefit over the next five years – in addition to many thousands of former private sector workers whose company pension scheme allowed them to draw a pension before state pension age.
This analysis was undertaken to coincide with the publication of the group’s first “Good with your Money” guide, entitled “Everything you ever wanted to know about topping up your State Pension” which can be downloaded here.
Webb said: “Large numbers of workers could gain a substantial boost to their State Pension for the payment of a relatively modest lump sum but the rules around topping up state pensions are complex. It is rare for the Government to offer something on such generous financial terms and we want to make sure everyone knows how to take advantage of this opportunity.”