Jill Kerby
Are you receiving a UK state old age pension? Did you – like hundreds of thousands of Irish emigrants work in the UK, pay National Insurance contributions (popularly known as “the stamp”)?
If you did and are now getting a weekly UK pension, no matter how small or large, you might be interested in an opportunity to boost that pension by between £1 and £25 a week.
A significant programme of pension reform in Britain has been happening for several years. So far it has included a universal private pension plan and last April saw Pension Freedom Day, which gave people access to their private pensions from age 55.
From April 6th next, a universal state pension of £155 per week (€216) is being introduced for new pensioners in order to simplify and standardise a hugely complex system of UK state retirement payments.
Here, the state pension is a universal, weekly payment based on a set number of pay related social insurance contributions.
In the UK, the system has been earnings related and since earnings vary widely over the years supplementary pensions (SERPS) were added to the ‘basic’ pension, currently £115 for women aged 63 and men aged 65.
The second and other supplementary pensions mean that extra payments of c£165 per week have been paid to some people. (Only an official Pension Statement from the Dept of Work & Pensions can provide an accurate picture of individual UK pension value.)
From April 6th 106, a standard £155 pension payment will be made to all new retirees, and the additional pension top ups will no longer exist.
However, to allow existing pensioners or those retiring by April 5th, 2016 to boost their state pension income, they can make a once-off, lump sum, Class 3A voluntary contribution anytime between October 12th, 2015 and April 5th, 2017.
Depending on your age and the size of the lump sum payment you make, your UK pension will increase by £1-£25 a week. Annually, this works out at an additional £52 to £1,300 or €72.44 to €1,808 a year at today’s sterling/euro exchange rate. (UK pensions are paid in Sterling, so payments made to Irish based pensioners will be liable to currency exchange fluctuations.)
The cost of buying this ‘annuity’ is based on the pensioner’s current age: the, younger you are, the more expensive it is. For example, a pensioner aged 75, wanting to boost their annual pension by the maximum £25 a week (c€35) or €1,808 a year will have to hand over the equivalent of €23,436 to HM Department of Work & Pensions. A 70-year-old will pay €27,086 and a 65 year old, €31,294.
Expensive? Not really. Money currently sitting in an Irish bank deposit is earning nearly ZERO interest after inflation and DIRT.
Even at 1% net interest, you would need €180,800 in savings to get an annual, gross yield of €1,808 a year. Someone with just €23,436, €27,086 or €31,294 sitting in a deposit account can expect just €234.36, €270.86 and €312.94 in annual interest, not €1,808.
Are there tax implications? Yes, but first it should be noted that Irish tax residents pay no income tax in the UK.
Pension income from the UK is taxable here, but anyone 65 and over can earn up €18,000 a year (€36,000 for a married couple) and pay no income tax. State pension income (including from the UK) is exempt from USC. Pensioners aged 65+ pay no PRSI.
If your total income still remains below the tax-free thresholds after boosting your UK pension then using your savings to make this top-up is well worth considering. Get independent, impartial financial and tax advice.
A final note: it’s true that pension annuity purchases are generally not popular. Bond yields are very low and the annuity can revert back to the life assurance provider.
But this UK annuity top up is not just guaranteed, but is also indexed to annual inflation. It can also be inherited by a surviving, dependent spouse and is especially valuable if that spouse is younger.
For example, a 70-year-old today who buys the maximum UK pension top up for €27,000 and lives to 100 will enjoy an additional €54,000 worth of inflation protected income (€1,808 x 30 years).
But a younger widow, say 63, might be liable to up to 100% of his pension and the top up. If she lives to be 100, the top up alone could give her extra pension income of nearly €67,000! (€1,808 x 37 years).
My own pension adviser, who happens to also specialise in advising ex-pats and other clients with foreign assets, briefed me on these UK changes.
But every good adviser should be up-to-date with pension changes in the UK, US, Australia, Canada etc where so many Irish have lived and worked.
To get more information yourself, see www.gov.uk/additional-state-pension/furtherinformation. To arrange for a UK State Pension Statement, see https://www.gov.uk/state-pension-statement
Do you have a personal finance question for Jill? Write to her at The Munster Express, 37, The Quay, Waterford X91 DC 83 or email: jill@jillkerby.ie
