Younger people should be given the choice to take a year of their state pension early in exchange for working longer, a think tank has said, in a report that takes aim at intergenerational wealth unfairness.
The so-called ‘Citizens Advance’ would give people a choice – receive a lump sum now in exchange for postponing the point at which they start receiving their state pension.
Only those who had built up 10 years’ worth of National Insurance contributions would be eligible.
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At the current full new state pension rate for a year, those using such a scheme could be given up to £12,547 decades before state pension age.
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The proposal, put forward by think tank the Social Market Foundation and Andrew Lewin, the Labour MP for Welwyn Hatfield, highlights how family wealth levels can “alter the course of people’s lives”.
While only a third of adults expect to benefit from an inheritance, those who do will share in some estimated £5.5 trillion expected to be passed down by Baby Boomers in the “Great Wealth Transfer”.
“As the Great Wealth Transfer takes place, the sense of injustice around wealth inequality may only therefore increase without government action. Something has to give,” said the report’s authors.
Rachel Vahey, head of public policy at AJ Bell, said: “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.”
We look at how much you need for a comfortable retirement in a separate article.
Early state pension lump sum
Support for the policy suggestion was, perhaps unsurprisingly, strong among 25 to 40-year-olds, who might expect to be the key beneficiaries, according to the report, which surveyed 2,000 adults, did AI-led qualitative interviews with 300 respondents and carried out three focus groups.
Most in the 25 to 40 year old age group were in favour of a Citizens Advance, irrespective of whether they would take it, with 54% positive versus just 6% negative. The rest were ‘neutral’ on the idea.
A majority of this age group said they would take such an advance if it was offered, ranging from 50% to 70% depending on the value of the lump sum, length of state pension given up and restrictions on how it can be spent.
The SMF report suggested an early cash advance lump sum could help revive home ownership dreams among the young – with more than two-thirds of 18 to 40-year-old non-homeowners currently of the view property ownership is a dead idea for their generation.
But the report also finds over-indebtedness is increasingly widespread, and a lack of wealth is holding people back from starting a business or family – debt repayment was the most popular intended use of a Citizens Advance, chosen by 18% of respondents to an SMF survey.
People asked in the SMF survey also described the value of the policy in emotional terms, not just financial, calling it “empowering” and allowing them to take matters into their own hands.
What would an early state pension lump sum cost?
A policy to give a year of state pension early could be delivered for £1.3 billion in year one, depending on how eligibility is set, according to the SMF report.
The size of the lump sum, whether it is taxed, who is eligible and how it is rolled out could all affect how much the policy might cost.
An untaxed £12,500 Citizens Advance would cost an estimated £1.3 billion in its first year if it was only made available to those reaching 10 years of National Insurance credits and born from 1998 onwards – i.e. those turning 28 this year.
If it were implemented, only those who went straight into work would be able to claim the lump sum in year one of the policy, with others in the 1998 cohort becoming eligible in the following years depending on their post-18 educational pathways.
Modelling by the SMF suggests costs would grow towards £7 billion as all groups and younger cohorts become eligible and take the Citizen’s Advance over subsequent years, after which costs would increase in line with the state pension.
Costs would be higher, at least in the first few years, if the policy was made available to multiple age cohorts at once. It would take an estimated £27 billion in year one to offer the lump sum to 28 to 35-year-olds, for example, or over £45 billion for those up to 40.
Tax on proposed state pension lump sum
Annual costs are estimated to fall towards £8 billion a year over time as take-up becomes driven by those becoming newly eligible, according to the report.
Making the lump sum taxable would cut costs by a third, as would restricting it to people
earning under the higher income rate (£50,271). Limiting its uses, such as to housing only, is another way of bringing the upfront costs down.
Vahey from AJ Bell said: “A proposal along these lines would 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.
“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.”
