State pension proposal could see Britons paid 'advance' £12,500 tax-free payment - what you need to know

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A policy proposal from the Social Market Foundation is calling on younger workers to pay part of their state pension entitlement early

State pension payments could be paid early to millions of Britons approaching retirement under a new proposal being floated by a leading think.

The Social Market Foundation has put forward a proposal that would let younger workers cash in part of their future state pension decades before retirement.

The think tank has outlined a scheme called "Citizens Advance," under which individuals born from 1998 onwards could claim an untaxed lump sum worth approximately £12,500.

In return, recipients would agree to begin drawing their state pension one year later than they otherwise would.

Rachel Vahey, head of public policy at AJ Bell, noted: "The idea of allowing people to access pensions early either private or state has done the rounds for years."

However, the SMF's latest recommendation represents a specific policy framework aimed squarely at younger generations.

To qualify for the Citizens Advance, applicants would need to have accumulated a minimum of ten years' worth of National Insurance credits. The SMF also surveyed people on how they would spend the money.

Clearing debts emerged as the most common intended use, chosen by 18 per cent of respondents. Housing costs came in as a close runner-up, with 16 per cent saying they would put the funds towards property.

Notably, the scheme would impose no restrictions on how the lump sum is actually spent. Recipients could direct the money towards anything from paying off credit cards to buying a car or booking a holiday.

Ms Vahey acknowledged that the proposal could provide a significant financial lifeline at a moment when many younger people are under real pressure.

She 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."

Ms Vahey pointed to the SMF's own research showing strong likely demand for the scheme, which she attributed in part to widespread scepticism about the future of state pension provision.

She shared: "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."

Under its most restrictive parameters, the SMF estimates the scheme would cost £1.3billion in its opening year. However, Mr Vahey cautioned that widening eligibility could see that figure balloon to nearly £45billion.

Such a scheme would also create cashflow difficulties for the Treasury, which would face upfront payouts long before any offsetting savings materialised in reduced pension expenditure decades later.