Why would anyone invest in their State Pension?
If you’re looking for something to invest in, have you thought about your State Pension? Now before you click away at this ‘ridiculous’ suggestion, bear with us for a minute.
OK. As investment opportunities go, putting money into your State Pension is nothing like speculating to accumulate with the latest high-tech start-up. Or backing a revolutionary business that looks set to disrupt its market. In fact, it’s probably one of the most boring investment options going.
But don’t discount it too soon, because it could be the best-performing investment you ever make. Here’s why.
Mind the gap
If you’re looking to maximise your income in retirement, it makes sense to start with your State Pension. The amount you get is based on your record of National Insurance Contributions (NICs). If there are gaps in your payments over the years, then you may not be entitled to the full State Pension. But even if that’s the case, all is not lost. You may be able to make a voluntary contribution to top it up and boost the amount you get – even if you’ve already retired. And here’s the best news. If you are eligible to top up, the cost is effectively subsidised by the Government, so it could mean you get quite a lot back for your initial investment.
Before we go any further, it’s a good idea to get a forecast for your State Pension and check if there are any gaps in your NIC payments. You can do that quickly and easily here.
How ‘investing’ in your State Pension works
Currently, the New State Pension amount is £179.60 per week. If there are gaps in your National Insurance contributions since 2016, each missing year is worth 1/35th of your pension entitlement. For each year you want to plug a gap, you would have to make a voluntary investment or top-up of £800.80 into your pension. (Voluntary rates are currently £15.40 a week x 52 = £800.80 pa – these rates may increase each year from here).
This may seem like a large sum to pay in, but for each year that you plug the gap, your pension will be boosted by around £5.00 per week (£179.60 divided by 35 = £5.13). That’s equivalent to £266 a year. So if you pay one extra year of NICs, you’ll get back what you paid after just three years.
Is it a good investment?
If your forecast shows that you won’t be getting your full State Pension amount then you may want to consider topping up your contributions. You’re looking at getting your initial investment back within around three years. For any other investment to generate a three-year payback, it would need to see an annual return of 25.99%. With cash returns still falling it suddenly starts to look like quite a decent thing to do.
Check your pension forecast today
Forewarned is forearmed. So check out your State Pension forecast here today. And if you need some advice (some of the rules and entitlements are very complex), get in touch and we’ll tell you all you need to know.