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With only six months left until the government’s state pension top up scheme closes on 5 April 2017, it’s worth considering if it could be right for your clients.

State pension top up is a class of voluntary national insurance contribution (known as Class 3A), which is available for a limited period. It allows those who reached state pension age before the introduction of the new state pension (women born before 6 April 1953 and men before 6 April 1951) an opportunity to exchange a lump-sum contribution for an increase in their state pension of between £1 and £25 per week.

State pension top up could be ideal for small business owners and the self-employed who historically may have had more limited opportunities to build up earnings-related state pension.

The cost of the contribution depends on the applicant’s age and the amount by which they wish to increase their state pension (the maximum per week is £25). The rates are actuarially fair and based on the age of the applicant, with rates reducing the older the person is. For example, to receive £10 extra per week at age 66 the cost will be £8,710 whereas at age 77 the cost will be £6,250. The increased payments are consumer price index-linked and it offers a secure income boost for life. For clients living overseas, if they live in a country where cost of living increases are not paid, then the top up amount will not increase.

In most cases, between 50% and 100% of the increased amount is inheritable by a spouse or civil partner on reaching state pension age, unless they re-marry, as per arrangements for inheritance of additional state pension under SERPS (additional state pension built up before April 2002).

As long as they are both eligible, both partners can pay contributions to receive the pension increase. However, if only one half of a couple is going to make a contribution, factors such as relative ages to each other and tax rates should be taken into account.

The Department for Work and Pensions will promote the scheme until it closes on 5 April 2017, and will encourage prospective applicants to get independent advice on whether the scheme is right for them.

The scheme isn’t appropriate for everyone, and the boosted amount is taxed as income and so may be more suitable for lower rate taxpayers (this could affect pension credits and any housing benefits). Options such as Class 3 voluntary national insurance contributions (‘VNICs’) should be considered first if there might be a shortfall in the person’s national insurance record for basic state pension.

It is possible to combine a state pension top up contribution with deferral of the state pension payment. State pension top up is open even to those already receiving the full basic state pension and any additional state pension.

The scheme has a 90 day cooling off period after payment, with payments already made deductible from any refund.

Further details and an online scheme calculator are available

Article from ACCA In Practice