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The government’s new state pension top-up scheme – is it worth it?

The government wants to do a deal with thousands of older people. From next Monday, anyone who has or will have passed retirement age by April 6 2016 will be given the opportunity to increase the amount of state pension they get every week by between £1 and £25.

To get this extra money, you will need to give the Department for Work and Pensions (DWP) a cash lump sum. How big this lump is depends on how much extra pension you want and your age – the younger you are, and the longer you are expected to keep receiving your pension, the more your top-up will cost.

Why has the government introduced the scheme?

The government is making this offer so that people whose state pension entitlement is relatively small – such as women who spent several years raising families rather than working and accruing extra pension – have the chance to increase their weekly incomes.

It comes ahead of next year’s introduction of what is supposed to be a simpler, more generous, flat-rate state pension, which will no longer involve the complexity of the means-tested pension credit or the state second pension (previously known as Serps).

Who’s eligible?

To be eligible to top up, you need to be born before 6 April 1951 if you’re a man before 6 April 1953 if you are a woman. The scheme is open from 12 October until 5 April 2017, and you have a 90-day cooling off period after buying a top-up in which to change your mind.

Is it worth it?

Tom McPhail at investment firm Hargreaves Lansdown says the opportunity is well worth considering. “No private pension company can offer such an attractive deal,” he says. “So if you are eligible and you want to buy yourself some inflation-linked guaranteed income for life, with death benefits for your spouse thrown in too, then this is the scheme for you.”

Husbands, wives and civil partners should be eligible to receive some of their partner’s extra state pension if they buy a top-up under this scheme.

How much will it cost?

Research from Hargreaves Lansdown shows the cost of buying the maximum £25-a-week (or £1,300-a-year) top-up: for a 65-year-old man or woman, the lump sum required would be £22,500. But getting the same income – linked to inflation like the state pension is – through a commercial annuity would cost more than £35,000.

For a 70-year-old, the top-up would be £19,475 but more than £30,000 from an annuity firm. Bear in mind that if you have serious health problems and therefore reduced life expectancy, your state pension uplift will not reflect this.

But Hargreaves says that the government top-up is still likely to pay a better rate than a more generous “enhanced” annuity aimed at those with chronic medical conditions.

To find out more and to get a calculation of how much a top-up might cost you, visit this government website.