New state pension plan could give ‘early access’ to £12,500 lump sum | Personal Finance | Finance

A leading think tank has put forward a policy proposal to allow young people to get the first year of their state pension early as a lump sum. On Tuesday, the Social Market Foundation (SMF) published a proposal for Citizens Advance, by which those born from 1998 onwards could take a tax-free lump sum of around £12,500 in exchange for delaying receipt of their state pension by a year in retirement.

It would only be available to those who have built up at least 10 years’ worth of National Insurance credits, meaning anyone who would benefit would already be on the path to claiming the state pension later in life. A survey by the SMF found the most popular intended use of the Citizens Advance was debt repayment (18%), closely followed by housing (16%). It’s seen as a way to help address the inequality of some people being able to rely on the “Bank of Mum and Dad”, by allowing younger people from less privileged backgrounds to access capital they’re contributing to earlier.

This could allow them to retrain, spend more time with their families, or get on the housing ladder.

SMF estimates that, at its most restrictive basis, the cost would be around £1.3bn in the first year, but that the spending would largely be recouped through savings to the pensions system and wider economic benefits over time.

The idea of a Citizens Advance was raised by Andrew Lewin, the MP for Welwyn Hatfield, who has championed the policy and acted as a “sounding board” for the research.

Rachel Vahey, head of public policy at AJ Bell, said it would have clear advantages for some people, but would likely add to the strain the Treasury is facing.

“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,” she said.

“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.

Ms Vahey says that 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,” she added.

Ms Vahey warned that beyond the restrictive basis proposed “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.”

A Department for Work and Pensions (DWP) spokesperson said: “Unlike other savings, a State Pension cannot be rebuilt once accessed ahead of time, meaning those who do so may find themselves with reduced income later in life.

“We want to help people reach major life milestones such as buying a house which is why we are boosting housing supply and addressing the cost-of-living head on through initiatives such as taking money off energy bills to put more money in people’s pockets.”