A radical policy proposal that gives younger people the choice to receive the first year of their state pension early as a lump sum has been put forward by the Social Market Foundation.
The proposal, known as the Citizens Advance, would give people a choice to receive a lump sum now in exchange for postponing the point at which they start receiving their state pension.
Under the proposal, anyone aged between 28 and 40 who has accumulated 10 years of National Insurance credits would be eligible to apply for the Advance. They would be entitled to around £12,500 – the current rate of the full State Pension – and in return, their state pension would begin one year later than it otherwise would have done.
The Social Market Foundation said this would nearly fully cover a 10% deposit on the average home if a couple bought together with two Advances.
The idea stems from concern that younger people face an onslaught of financial challenges, with over two-thirds of 18-40 year old non-homeowners stating that they believe the dream of property ownership is dead for their generation.
While the Great Wealth Transfer will see £5.5 trillion passed down through generations over the next two decades, just a third of adults expect to benefit from inheritance.
The think tank said support for the proposal was broadly positive. More than half (54%) of 25-40 year olds were in favour of the Advance irrespective of whether they would take it, while just 6% were negative. A majority of this age cohort say they would take the Advance, ranging from 50% to 70% depending on the value of the lump sum, length of state pension forsaken and restrictions on how it can be spent.
Debt repayment was the most popular intended use of the Citizens Advance, chosen by 18% of respondents, followed by housing (16%). However, the most common concerns of respondents were that the State Pension age would keep increasing, a future government might ask for the money back and that government may not tell the full truth about the policy.
The Social Market Foundation said the policy could be delivered for £1.3 billion in year one if it was only made available to those born from 1998 onwards. However, costs could rise to as much as £45 billion in year one if the policy was made available to those up to 40 years of age.
Commenting on the proposal, 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.
“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.”
However, Vahey warned that the proposal would present cashflow challenges for the Exchequer.
“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.”
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