For example, a 63-year-old woman who would have to pay £934 for £1 income through the class 3A top-up route could instead pay voluntary class 3 contributions of £733.20 (£14.10 x 52 weeks) and increase her state pension by £3.87 per week.
The other option for those reaching state pension age is to delay taking income straight away. For every 9 weeks it is deferred, the state pension increases by 1 per cent. For those eligible for a full state pension of £155.65 a week (£8,093.80 a year), deferring would generate at least an extra £468 a year in higher weekly payments.
Understanding options
So far this article has deliberately focused on the possibilities that now exist when it comes to taking the state pension entitlements, such as topping up or deferring. Each option will appeal to different types of people and ultimately a host of factors such as age, health, wealth, risk profile and capacity for loss will make a difference.
Our view is that increasing numbers of those heading into retirement will want to be confident they properly understand how the state pension options relate to their own individual circumstances before deciding how to deploy their own private pension money.
While the majority of clients may face a number of state pension options, some may also have some entitlement to other benefits.
Half of pensioners are entitled to some benefit but we know from our annual state benefits research how important it is that pensioners struggling for income check whether they are claiming the full amount of state benefit as increasing numbers may be losing out.
Our most recent research showed a worsening in take-up rates, with around six in 10 of those entitled to key benefits – council tax benefit or the guaranteed or savings element of pensions credit – receiving no benefit at all.
The figure has increased for five years running with the most recent report showing an average annual loss of £797 but in one case the loss was £6,890. And of those who are claiming, one in three receives less than they are entitled to.
This may not seem like the typical wealth manager’s natural client base, but an interesting point is that official figures regularly show that take-up overall is higher than for our sample which only covers home-owners. This is not the poorest but the so-called “squeezed middle”.
That suggests many people may believe that the fact they own a home rules them out of receiving any state benefit, however much they may be struggling for income. Clearly they could benefit from more targeted information and ideally better guidance from a body such as Pension Wise and, in many cases, professional advice too.
