Pension Top-up, Best Savings Rates, or Deferral?

The problem stems from the government decision to simplify the state pension system from April 2016. As part of reform, the second state pension will officially be abolished at that time. This poses a problem for a certain segment of workers who have opted out of the second state pension in the past and, due to additional circumstances, will not be eligible to receive the full basic state pension of £155 per week.

Three Solutions Offered

The writer of The Week article went on to present three options for affected workers: spend a minimum of £10,000 to purchase extra National Insurance credits between now and October of 2017, take that same £10,000 and put it into a savings account, or simply defer the state pension for a few years in order to increase payments. The writer went on to do the maths for all three options.

The first option is not even close to being acceptable. Spending £10,000 on additional National Insurance credits only amounts to an extra £572 annually. A pensioner who lived for ten years beyond retirement age would receive a total of £5,720 in extra payments after spending £10,000 to get them. It is an obvious loss.

The second option, taking the £10,000 and placing it in a savings account instead, is better – but not by much. The writer assumes the best savings rates of 1.8% on a two-year bond. Such a return would yield an additional £180 per year. After ten years the pensioner with have earned £1,800 in interest, considerably less than he/she would have received in extra state pension payments. BUT he/she would also still have the original £10,000. Under the first option, that £10,000 would be gone.

The third option is to defer the state pension for one year. Doing so would generate an additional £627 per year in state pension payments for someone who retired before 6 April 2016. Over ten years, that's an additional £6,270. Combining options two and three means the pensioner can take advantage of the best savings rates possible while at the same time increasing state pension payments to a higher level than would have been received had he/she purchased additional National Insurance contributions.

Property Beats Them All

We said we were going to demonstrate how property beats all three options, so here we go. Buy-to-let property has consistently averaged a 6% annual return since the mid-1990s. Let us take that £10,000 and combine it with an additional £10,000 from a private pension pot to generate a £20,000 deposit on an £80,000 investment property. Despite mortgaging £60,000, the total investment made is still £80,000. At 6% annually, that works out to £4,800 before expenses. Even if you assume half that revenue to cover expenses, you're looking at £2,000 annually. Over ten years, that same £10,000 will have earned you £20,000.

Of course, most buy-to-let landlords earn closer to the full 6% even after expenses. It is clear that property is better than the best savings rates on the market, better than deferring your state pension, and certainly better than spending money to top up your National Insurance contributions.

Sources:

The Week – http://www.theweek.co.uk/pensions/65144/state-pension-boost-top-up-vs-deferral

Google+

Jonathan Caplan

by Jonathan Caplan - Property developer, investor and Fruitful founding Director.

ACT NOW
What Next
comments powered by Disqus
Rich Dad's Cashflow Quadrant

Rich Dad's Cashflow Quadrant

by Robert Kiyosaki

a compelling explanation of the core financial principles of behind being successful in work, business and investing.

Nick Hopkinson

Winning!

Winning!

by Sir Clive Woodward

exciting and practical insight into the business skills and sports psychology behind how England won the Rugby World cup in 2003.

Nick Hopkinson

The Art of the Deal

The Art of the Deal

by Donald Trump

like him or loath him, Trump shares his story and the drive that created a self-made billionaire, mainly from property.

Nick Hopkinson

FT Weekend Money supplement

FT Weekend Money supplement

essential weekly reading for UK investors wanting to know the best ways to invest and protect their money.

Nick Hopkinson

Renting Out Your property for DUMMIES

Renting Out Your property for DUMMIES

by Melanie Bien

straightforward advise and practical checklists for managing all aspects of your UK rental property.

Nick Hopkinson

Steve Jobs

Steve Jobs

by The Exclusive Biography

inspired stories and life lessons from the man who created Apple and then changed the world twice!

Nick Hopkinson

Winning

Winning

by Jack Welch

sage advice on business and leadership by the arguably the greatest business leader of the 20th Century.

Nick Hopkinson

Previous Next

“I have been very happy with the properties which Fruitful brought to me attention as good long-term investment opportunities; four of which I bought for buy to let purposes over…

Philip Groves

“Over the past few year we have purchased many properties through Fruitful Property and were delighted at how easy they are to do business with.  They introduced me to properties…

Chris Robinson
read more

got a quick question?

We're here to help! Just fill in the form below and we’ll get right back to you.

Are your investments working as hard as possible?

Earn 15% annual return on your money with off-market bank repossessions.

Access off-market, high yield investment properties.

Act now. Profit from a recovering UK property market.

Fruitful Property Investment
Intrigued call us now
+44 (0)20 7148 5858