Figures obtained from the government reveal the startlingly low take-up of voluntary state pension top-ups, despite the attractive rates on offer. 

Less than 4,000 people have taken the opportunity to make Class 3A voluntary national insurance contributions, suggesting that the option to buy extra pension income at very favourable rates is not well understood.

Data provided by the Department for Work and Pensions (DWP) in response to a Freedom of Information request by Old Mutual Wealth shows just 3,848 eligible applicants purchased additional state pension units six months into the eighteen month eligibility window*.

Uptake is below government expectations. It originally projected eligible individuals would spend over £800m purchasing additional state pension income (£435m in 15-16 and 16-17). But savers committed just £64,252,000 to the scheme up to April 10 this year. 

This is despite the fact that the rates available on additional state pension income are typically favourable when compared with the equivalent rate available through annuity providers.

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. This means 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 around 2.7%.

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.

Jon GreerCommenting on the figures, Old Mutual Wealth pension technical expert Jon Greer says:

“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. 

“State pension top-ups won’t be right for everyone, but they are certainly something that people should consider as part of their 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.

“The good news is there is still time to act. Eligible participants can still apply for a state-pension top-up until April 2017.

“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.

“The FCA recently served a reminder of the importance of making informed retirement-income choices, again highlighting how vital it is that people that time to consider their options and seek expert support to help them make the right choices.”

*Figures obtained by Old Mutual Wealth courtesy of Freedom of Information request. Data from October 12 2015 to April 10 2016 supplied by the DWP. 



For more information contact

Michael GlenisterOld Mutual Wealth020 7778 963807469

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