Pensioners and those approaching retirement will soon be able to top up their state pension and receive an extra £25 a week income. The offer will apply to all existing pensioners and those retiring before April 2016 in order to bring their state pension in line with those that will receive the new flat rate pension due to be introduced that month.
The flat rate pension is designed to simplify payments and ensure women are not penalised for taking time out of their careers to raise children. It will equate to £144 using the current value of sterling.
Before the flat rate pension is introduced the Pensions Minister Steve Webb has said older people may want use any savings they have put aside to increase their state pension.
"One of the problems for people who have already retired is that their savings are often getting very poor rates of interest," admitted Webb.
"What the Government is saying is if people have a bit of capital put by and they want to give it to us in the form of extra Voluntary National Insurance Contributions, we will increase their pension and that will go on for as long as they live, and it will be linked to inflation. If they die and there's a surviving spouse a bit of money will go to them as well. It's just a new way of using your savings to boost your retirement income."
This proposal was first announced in December, but details have emerged this week which reveal the scheme will be open from October 2015, and according to Webb will require "modest amounts of capital - £30,000 is the maximum".
This comes in the same week that Webb floated the concept of ‘Collective Defined Contribution’ workplace pension schemes which could result in an extra 30% of retirement income.
The schemes would be lower cost than current defined contribution schemes – but there are more complicated risks involved. Unlike an annuity, which guarantees a stable retirement income, income from collective schemes could vary year on year dependent on how the underlying investments performed.