State Pension compared to investment

Advising clients on topping up their state pension. Is the stock market a better prospect?

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Off the back of the closing of the window to top up NIC going back to 2006 I am having a lot of conversations about whether it is worth it.  One client thinks that investing the voluntary contributions in the stock market will be a better investment option...granted, he is in his early 30s so time and compound interest are on his side, but has anyone seen any comparisons between what you can expect from the State Pension and what you might be able to achieve with an alternative investment?

From my perspective, even paying the highest rate under Class 3 you get the top up back within around 3 years when you start to receive state pension and once you get past that tipping point the pension for the rest of your life is profit.  

Replies (18)

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By frankfx
06th Mar 2023 17:54

Not sure I would offer advice.
Insight yes .
Let an investment advisor do the graft.

A good answer could be:

Spread your investments, and state NIC catch up contributions are part of a mixed portfolio.

Have you done the maths, for the advice you are providing ?

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Replying to frankfx:
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By Paula@Butt
06th Mar 2023 18:10

I have calculated the cost of the additional years and the additional pension expected at current rates. I declined to comment on the stock market comparison. It was just an interest as the point has now been raised.

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Replying to Paula@Butt:
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By Not Anonymous
06th Mar 2023 18:56

And presumably found that a one off payment of NI, picking the correct years, not one adding the final pennies, could generate an amazing return compared to most mainstream regulated investments.

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By ABC12
06th Mar 2023 17:56

Shouldn't be giving out pension advice to clients unless you're regulated to......

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Replying to ABC12:
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By lionofludesch
06th Mar 2023 19:57

ABC12 wrote:

Shouldn't be giving out pension advice to clients unless you're regulated to......

No, indeed. This is investment advice.

Highly dependent on when the client is thinking of dying anyway. He'll never know until it's too late and then he won't care.

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Replying to lionofludesch:
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By More unearned luck
06th Mar 2023 22:48

But his executors might.

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Replying to More unearned luck:
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By lionofludesch
06th Mar 2023 23:05

More unearned luck wrote:

But his executors might.

In what way?

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Replying to More unearned luck:
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By paulwakefield1
07th Mar 2023 07:21

I obviously haven't woken up yet. I read that as executioners. Eek!

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Replying to lionofludesch:
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By kevinringer
08th Mar 2023 10:15

lionofludesch wrote:

Highly dependent on when the client is thinking of dying anyway. He'll never know until it's too late and then he won't care.

At least the client won't be able to sue the advisor for poor advice.

Seriously, I am just explaining to clients the NI implications and if they want investment advice I tell them to speak to their IFA.

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By zebaa
06th Mar 2023 18:52

Remember, governments can change the rules. This could include things as wide as universal state pension on one hand to paying for health costs if NI record not fully complete at the other extreme. Nor can you use historical performance of the stock market to extrapolate. In my opinion any advice you can offer has to be issued with such warnings as to make it useless.

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paddle steamer
By DJKL
06th Mar 2023 21:26

One other consideration, state pension currently requires you to live to state pension age to receive or your having a spouse/civil partner with fewer contribution years to inherit your contributions if you have an early death, other pension funds unvested are however often available as death benefits. (Mine were effectively a life policy when we had a mortgage so that if I had died my other half could readily fully repay mortgage and bank the excess)

Notwithstanding they may be of benefit but may not, certainly if only in 30s good chance there are enoug hother years left available before state pension age to catch any shortfalls. (albeit maybe not intending working into 60s and HMG can whim like change rules, albeit they also can with money purchase schemes)

My very crude rule of thumb, and this is certainly not pension/investment advice, is investments roughly double every ten years if a 7% total return achieved compounded (certainly I have over the years achieved 7% or more, but past history etc), however state pensions rights are currently inflation proofed so what you will get is very possibly much more than current state pension, the state pension has more of the look of a defined benefit scheme rather than a money purchase and is a of course a good bedrock to anchor retirement with other pensions on top.

I am a glass half empty individual, I like that we have two reasonably certain (at our ages, 62 & 63) state pensions to anchor our retirement (albeit death of my wife cuts a big hole in anticipated retirement income re losing her state pension) but we also have one DB scheme (only paying 50% to me if my wife predeceases, so double blow if she dies, loss of half her DB plus her state pension) plus two money purchase schemes and some AVCs.

I am a firm believer in pensions (they make IHT planning simpler ) but 30 odd years is a very long time to forecast and I doubt there is a correct answer without a crystal ball.

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By nrw2
07th Mar 2023 09:09

If there's one thing to trust about UK gov, it's their ability to change the rules on a whim and their inability to keep promises or provide sufficient tax policy certainty for long term investment, at both an individual and business level.

Paraphrased, I'm not surprised your chap in his mid-thirties is sceptical about NIC contributions today turning into cash in >30 years' time. There's something to be said for retaining control of it over that time horizon.

But this should be his call rather than your advice.

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Replying to nrw2:
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By I'msorryIhaven'taclue
07th Mar 2023 09:44

nrw2 wrote:

If there's one thing to trust about UK gov, it's their ability to change the rules on a whim....

There's already talk of raising the number of contribution years for a full pension from 35 back to 40 (It used to be 40 years' contributions back in the days when retirement/OAP age was 70. Churchill was largely responsible for lowering those 40 & 70 years' thresholds; and now the wheel will turn full circle.)

On breakfast tv this morning the news is all about migrants being deported by the boatload (it's only at Parliamentary Bill stage, so will be take months to enact). All of which is IMHO a smokescreen for the real news bombshell, which is that free prescriptions for the over 60s is set to disappear (in England, at least). Changing the rules on a whim!

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Replying to I'msorryIhaven'taclue:
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By paulwakefield1
07th Mar 2023 09:58

Keep up at the back! This is not new.

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Replying to paulwakefield1:
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By I'msorryIhaven'taclue
07th Mar 2023 10:06

Which bit? Raising the pensions' bar, or no more free Sildenafil?

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Replying to I'msorryIhaven'taclue:
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By paulwakefield1
07th Mar 2023 10:24

Good question. Free prescriptions - there has been a consultation document out since July 21 which was largely along the lines of "We're doing it - just a question of how and when".

I'm alright Jack as I'm over pension age so not affected. :-)

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
07th Mar 2023 10:30

I'msorryIhaven'taclue wrote:

nrw2 wrote:

If there's one thing to trust about UK gov, it's their ability to change the rules on a whim....

There's already talk of raising the number of contribution years for a full pension from 35 back to 40 (It used to be 40 years' contributions back in the days when retirement/OAP age was 70. Churchill was largely responsible for lowering those 40 & 70 years' thresholds; and now the wheel will turn full circle.)

Churchill may have lowered the 40 year qualification but it was 44 for men, 39 for women not so long ago. Then reduced to 30 and raised to 35. Not that I'm suggesting that the government don't know what they're doing.

Interestingly, one of the reasons Churchill dropped the pension age was to free up jobs, so maybe young folk should prepare for some periods on the dole.

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By Duggimon
07th Mar 2023 09:45

If my client had decided that the stock market was a better investment option after I had told him about the opportunity to top up his pension, what it would cost him and what, under the current rules for pensions, would be the benefit in doing so I wouldn't be looking for anything to convince him otherwise even if I thought he was wrong.

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