Amid the unremitting gloom of collapsing house prices, collapsing currencies and collapsing markets, the government announced some good news last week. Or rather, it said it announced some good news. From now on, said the spin, all women, regardless of whether they have managed to build up the 39 years of National Insurance contributions required to qualify, will be entitled to a full state pension.
This sounded great. For years now women (and the occasional man) who have taken years out of the work place to care for children and sick or old relatives have been campaigning to be entitled to the same standard of living in their old age as those who have worked in the formal economy. They’ve had little joy: right now only one third of women retire with a full state pension.
Buying state pension years won’t come cheap
So how pleased should they be now? Not very, says pensions campaigner Ros Altman. The key point to note is that no one who hasn’t made all the right contributions is suddenly going to get the full pension for free. Oh no. They are going to have to pay for it by “buying” from the government the years they are short (note that from 2010 you only need 30 years of contributions). And those years aren’t going to come particularly cheap. How do we know? Because even now, you are already allowed to buy back 6 years and they cost you £420 each. So if you want to buy back, say, 10 years, it is going to cost you well over £4,000 at today’s prices. That’s no small sum for a retiree to come up with, but it also isn’t likely to be the price they end up paying either.
The government – predictably given quite how cash strapped it is – has said it intends to raise the price of a year in the future but, as ever, hasn’t said by quite how much. What’s worse, given the “all women will get a state pension spin” is that this deal isn’t open to all women at all. If you don’t already have 20 years of NI contributions in the bank, you aren’t allowed to buy back any more anyway.
3 reasons not to write a cheque to the Treasury just yet
So, if you have the 20 years and you have the cash, should you start writing cheques to the Treasury? Not if you think you might not live long. If you only survive a few years after starting to get your pension, odds are you’ll never earn your money back in pension. That might be good for the Treasury, but it won’t have been so good for you. And not if you are pretty poor already. As Altman points out, if you haven’t much other income you could well qualify for the means-tested Pension Credit. This is not in any way related to your working life or to NI contributions and comes to around £130 a week. The full state pension comes to only around £90 a week. Why pay more to get less?
A final point to bear in mind is that the government is broke. Very broke. So who’s to say that they won’t cut the state pension payout in the future anyway? Then you’ll have paid out thousands of pounds for something you might never get.
None of this is to say that it isn’t a good thing that a few women – who will already be better off than average, given that they have the necessary £4,000-odd knocking around in the first place – will end up with a larger pension than they would have otherwise. It is just to say that overall, the changes don’t quite live up to their billing. Most women will remain in exactly the same position they’ve been in for decades: at risk of finding themselves with not quite enough to live on in their retirement. We need, says Altman, “a radical rethink of how we support our elderly population.” Indeed we do.
How to get more out of your state pension
Still while I’m on the subject of state pensions I do want to remind you of one way to get a little more out of them. Delay taking yours up. For every five weeks you defer payment your pension rises by 1%. That equates to 10.4% a year. So say your state pension is £105 a year, says the Pensions Advisory Service, and you decide to not take it for five years. If you then decided to start taking it, you would get a weekly pension of £159.60 a week instead of £105. That’s not bad.
But even better is the fact that you also have the option of taking the money in a lump sum. In this case, you’d get £32,000 (before tax of course) and your pension would then be paid at the normal rate. Clearly this isn’t entirely risk free. Die during the five years and you’ll have missed out. But if you can afford the risk, it is a better return than you are likely to get anywhere else over the next five years.
• This article is taken from Merryn Somerset Webb’s weekly Money Sense email. Sign up to Money Sense here.
• Merryn’s book, Love is Not Enough: The Smart Woman’s Guide to Money, is now out in paperback.