A new proposal to give young people a lump sum of £12,500 in return for delaying their state pension by a year has got Britain talking.
Think tank the Social Market Foundation suggested that the advance be offered to young people who have worked for ten years, at around the age of 28.
It said the money could act as a ‘state alternative to the Bank of Mum and Dad’ and help them to get on the housing ladder.
In the current financial year, the full, new state pension is worth £12,547.60 for those who have 35 years of National Insurance credits.
Those who took the money would have to work an extra year before qualifying for the state pension – which is currently set at 68 for the 28-year-olds who the think tank suggested should be eligible for the advance.
But would it be a good idea to take the money, and what would be the best thing to do with it?
New idea: A new proposal to give young people a lump sum of £12,500 in return for delaying their state pension by a year got Britain talking
Join the discussion
Should young people trade future pension security for a lump sum to invest or spend today?
Under the proposal, people would be free to do what they like with the money. The largest group of respondents in a survey the Social Market Foundation carried out said they would use the money to pay back debt.
Meanwhile, if a couple both received the payment, the money could nearly fully cover a 10 per cent deposit on the average home in Britain which sits at around £268,000.
But financial experts say the best strategy for many would be to invest the money and keep it invested until retirement.
Doing so wisely aged 28 could leave you with far more than the state pension by the time you reached your first year of retirement.
This is essentially what you do with your workplace pension – it is invested to maximise gains in the long term.
Aaron Bright, analyst at investment platform IG, says: ‘For younger people with decades until retirement, time is one of the most valuable assets they have.
‘History shows that investing over long periods has often delivered returns that outpace inflation and cash savings, thanks to the power of compounding.’
Compounding is when you earn investment returns, and then earn returns upon those returns – creating a snowball effect.
Before investing any money, it is essential to clear any high-interest debts and make sure you have an emergency rainy day fund in cash, totalling at least three months’ essential spending.
How much could investing the money make?
If you invested the money and got back a 7 per cent annual average return, it could be worth £204,675 in 40 years.
The amount that someone would receive for one year of state pension could also rise in that time, though by much less.
If it increased in line with inflation, and inflation averaged 2.5 per cent over the next 40 years, it would total £34,000. It’s possible the state pension could also become less generous in the coming decades.
By the same token, the £204,675 pot the investor could be left with will not buy as much in 2066 as it does today.
In real terms, it is likely to be worth around £76,227 in 2066.
And if your lump sum earned a lower return than 7 per cent, such as the 5 per cent you could currently get in a top-paying easy-access savings account, you should expect a lower final sum.
In that case, your lump-sum would be worth around £92,300 after 40 years – which is still significantly more than the inflation-adjusted value of a year’s state pension.
Taking this option would mean you would lose out on the opportunity to spend the cash for a house deposit, to pay down debt or just have a nice holiday – but would likely set you up better in your first year of retirement than a year’s state pension would.
James Blower, savings expert, says taking the deal would be in most young peoples’ best interest.
He says: ‘I think it’s highly unlikely the pension will be what it is now in 40 years time for those individuals so I’d take the certainty of the money now and not the uncertainty of hopefully that year’s worth of money in 40 years time.’
The scheme would cost around £8billion a year initially, but this would eventually be recouped over time as those who received the advance would have their state pension payments delayed.
Britain spent around £146.1billion on state pensions in 2025-26, according to the Department for Work and Pensions.
Browne added: ‘Perhaps the biggest sticking point for the idea is whether the Government – or any Government for that matter – could afford it. The Triple Lock is increasing the cost of the state pension every year, and the Treasury would have to pay billions more.
‘It’s an innovative and exciting idea, but it may be difficult to make it both financially sustainable for the Government and genuinely beneficial for individuals without significant complexity and risk.’
If this deal ever did materialise, it would also be important for young people to understand what they were getting in to.
Financial planner at Smith & Pinching, Dan Browne says: ‘This isn’t free money – getting it requires you to trade away guaranteed, inflation-linked retirement income in exchange for a lump sum today.
‘That’s a complex calculation with long-term consequences that many people may struggle to fully evaluate.’
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