Retirement experts are split over whether 60-somethings should be offered the option of drawing the state pension early but at a reduced rate.
The debate has reignited in response to an official Government review of the state pension age, which is looking into bringing forward a rise to 68 to 2037-2039.
Around one in six people would be interested in starting to receive payments early according to a recent industry survey. Meanwhile, a previous poll of This is Money readers found 86 per cent were in favour of savers being given the opportunity.
Would you take state pension early? Split over ‘flexible’ age limit emerges during official age review
Both men and women’s state pension ages are currently 66, and between 2026 and 2028 they will both rise again to 67.
The full basic state pension was hiked to £141.85 a week earlier this month, while the full flat rate pension introduced in 2016 was raised to £185.15 a week.
The Government should explore offering individuals more choice over when they can start claiming, for example by up to three years earlier at a reduced amount, the pension firm Aegon has said in response to the age review currently under way.
‘While individuals can already choose to defer their state pension in return for a higher monthly payment, there’s no flexibility to start it from a younger age,’ says the company’s pensions director Steven Cameron.
‘The higher the state pension age, the more individuals will struggle to stay in full time work. This could be because of their health, a physically or mentally taxing job or caring responsibilities for elderly parents.’
Cameron says an ever-rising fixed state pension age could become ‘increasingly divisive’, and out of sync with flexible private pensions – the minimum age for taking these is set to rise from 55 to 57 in 2028.
But he acknowledges that some people who opted for an earlier reduced state pension could end up on an income below the current threshold for means tested benefits.
‘To understand any impact on their eligible to claim such benefits, individuals might be required to take advice or guidance from Money Helper.’ This Government-backed organisation offers free help on money issues including private pensions.
Former Pensions Minister Steve Webb previously responded to a grounds worker who was struggling to manage his job at age 52 in a This is Money column on this issue.
‘One of the main reasons why it would be challenging to introduce a reform of this sort is the relatively low level of the state pension in the UK,’ he told him.
Webb compared the full state pension to what people get in pension credit, and how reducing it by 5.8 per cent for each year that you took it before state pension age – the same rate as used for uplifting payments after a deferral – would lead to much lower payouts.
In reality the people most likely to take up an early state pension option would be the relatively well off
Steve Webb, former Pensions Minister
Today Webb, who is a partner at pension consultant LCP, says: ‘Flexibility to take state pension early and at a lower rate sounds great in theory but would be of least benefit to the group it was most intended to help.
‘For those with no other income, a reduced state pension would leave them below pension credit level not just at retirement but for the rest of their life, something which those on lower incomes could not afford.
‘In reality the people most likely to take up an early state pension option would be the relatively well off who could combine an early state pension with other pensions.
‘This in turn would have to be funded by increasing National Insurance Contributions on today’s workers, who are already facing a serious funding squeeze.
‘This whole idea is a very poorly targeted way of addressing real concerns about rising state pension ages.’
Andrew Tully, technical director at Canada Life, says: ‘The difficulty with giving people choice on when their state pension starts is the complexity.
This could help those with limited life expectancy receive a larger amount of state pension income
‘The best outcome for an individual will depend on a number of factors including how long they live, how much other income they are receiving and the tax they are paying as a result.
‘Inevitably it will lead to some people making the wrong decision, especially as most won’t have access to advice to help them.
‘We’ve seen from the pension freedoms many people will simply take benefits at the earliest possible opportunity, whether that is the best decision or not.’
AJ Bell surveyed 1,100 adults in February and found 17 per cent would be interested in taking their pension early at a reduced rate, 55 per cent would not be interested and 29 per cent were not sure.
Tom Selby, the firm’s head of retirement policy, says: ‘If the Government wants to provide extra flexibility, it could examine the case for allowing people to access their state pension early at an actuarially fair reduced rate.
‘This could help those with limited life expectancy receive a larger amount of state pension income.
‘It could also be relatively simple to implement, mirroring existing flexibilities which allow people to defer receiving their state pension.
Drawing the state pension early – have your say
This is Money ran a reader poll on this in late 2020, when 86 per cent voted for savers being allowed to take the state pension early with smaller payments.
We are running a fresh poll, to find out what you think now.
Did you take part before, and have you changed your mind? Tell us in the comments below.
‘However, there would also be challenges, most notably to the Treasury if large numbers of people rushed to access their state pension earlier. If healthy people access their state pension early they may also face more severe income challenges in later life.’
Selby adds: ‘A number of options have been posited which could make the state pension fairer.
‘For example, some have suggested that setting state pension age based on someone’s postcode should be considered, to reflect the fact life expectancy in different parts of the country vary significantly.
‘State pensions based on postcodes would be a nightmare to implement, cause horrendous complexity and possibly perverse actions, and would inevitably be hugely costly to administer.
‘We would strongly urge the Government to err on the side of simplicity.’
A Department for Work and Pensions spokesperson said: ‘The state pension provides the foundation for retirement planning and financial security in older age.
‘The Government is required by law to regularly review the state pension age and has launched the second state pension age review.
‘This will consider whether the rules around state pension age are appropriate, based on a wide range of evidence including latest life expectancy data and two independent reports. It is too early to speculate on the outcome of this review.’
TOP SIPPS FOR DIY PENSION INVESTORS