The Social Market Foundation (SMF) has today published a policy proposal to allow younger people to receive the first year of their state pension early as a lump sum.
Under the proposal for Citizens Advance those born from 1998 onwards could take an untaxed lump sum of around £12,500 in exchange for receiving the state pension a year later. Only those who have built up at least 10 years’ worth of National Insurance credits would be eligible.
In a survey by SMF, the most popular intended use of the Citizens Advance was debt repayment (18%), with housing a close second (16%). In terms of how much this might cost, on its most restrictive basis, SMF puts the cost at £1.3bn in the first year
Working through the numbers and some of the scenarios which this proposal might mean if brought into effect, Rachel Vahey, head of public policy at AJ Bell, comments:
“The idea of allowing people to access pensions early – either private or state – has done the rounds for years.
“The obvious potential benefit to this particular proposal is it could deliver a much-needed cash boost at a time many people really need it, particularly if they’re trying to repay debt or save for a deposit on a first home. The downside is that in doing so they would have one year less of state pension income to rely on in later life.
“SMF reports a high likely take up of the proposal, perhaps not surprisingly as people would be able to spend the cash on whatever they wanted – not just to repay debt or buy a first home, but even a holiday, a car or new wardrobe. Given the uncertainty that exists around what the state pension will be in the future and when younger people might receive it, the lack of trust in governments will push large numbers of people into opting to raid the cookie jar as soon as they can.
“A proposal along these lines would also present cashflow challenges for the Exchequer, as it would need to pay the money out on demand to anyone who qualifies, whereas at the moment state pension entitlement only kicks in at state pension age. The SMF puts the cost at £1.3bn in the first year if restricted to only those born after 1998 and only offered at the point they reach 10 years of National Insurance Contributions. But go beyond this incredibly restrictive basis and costs soar. It could rise to almost £45bn if offered to all those born after 1986 and they were given five years to decide.
“Even if early access was offered on the most conservative basis, this would amount to a rise in today’s government spending which would only be offset in decades, potentially creating pressure on the public finances at a time when they are already stretched to breaking point.
“The state pension remains an important part of many people’s retirement income. But for those at the start of their working lives, there is real uncertainty about how much future governments will pay, how it will rise and when it will be available. Younger people may be better off building their own retirement savings through workplace and personal pensions, rather than relying too heavily on a benefit that is likely to change before they retire.”
