Should people be allowed to draw state pension early?

The rise in state pension age to 66 today has reignited calls for people to be given the option of drawing it earlier, but on a reduced income.

Increased unemployment and caring responsibilities among older people during the Covid-19 pandemic mean the idea should be looked at again, say some pension experts.

Older people who want to delay taking the state pension can receive hikes in payouts for doing so, and a similar flexibility should be offered to those who would prefer drawing it earlier than 66, they argue. 

The full state pension is currently £175.20 a week, or around £9,100 a year, and is a crucial source of income for many retirees, especially if you haven’t got much saved in work or personal pensions.

But pension credit, which provides a safety net for the poorest pensioners, is £173.75 a week for single people and £265.20 for couples.

So, there is not much leeway to offer reduced state pension below this income level for those who solely rely on it in their old age.

The Government reviews the state pension age every six years, and the next look is due in 2023. The last one endorsed the universal principle of one state pension for all.

Changes to state pension age have caused huge controversy in recent years after the Government sped up two changes to women’s age and timed them in quick succession – especially as many say they were sent no formal notification of the changes.

But a landmark case against the increase in women’s state pension age was dismissed by the Court of Appeal last month. 

State pension age has reached 66 for both men and women today, so we round up what financial experts say about offering early access, and you can have your say in our poll.

Offer an early state pension after people reach 63

‘The pandemic has caused havoc in the labour market, and in the current climate many workers approaching state pension age may find it very difficult to get another job,’ says Caroline Abrahams, charity director at Age UK.

‘In reality, some may never work again, and it is important that Government takes firm action to help.

‘Those who are within three years of their state pension age and have caring responsibilities, a disability, or who are likely to fall into long-term worklessness, should be entitled to their full state pension.

‘It is only by taking bold action such as this that the Government can help people in this position enjoy a dignified and to their working life and retirement.’

Age UK previously commissioned research on the options for introducing an earlier state pension, which looked at: 

– Allowing it after people have made 45 years’ worth of National Insurance contributions

– Giving full early payouts to people like carers and the disabled

– Making the pension credits system of means-tested benefits more generous.

Covid-19 may lead to increase in unemployment among over-60s

‘In the private pension space, pension freedoms have proved hugely popular in allowing people to take more control over when they start drawing their defined contribution pension, currently from as early as age 55 increasing to 57 in 2028,’ says Steven Cameron, pensions director at Aegon.

‘But this is not reflected in the state pension where as of today the minimum access age is 66 for all, and will increase further to age 67 in 2028.

‘The higher the state pension age is, the more difficult it will be for those in stressful or manual occupations to keep working until state pension age.

‘On top of this, the fall-out of the Covid-19 pandemic may see an increasing number of those in their early 60s losing employment and struggling to find a new role.’

Cameron calls on the Government to explore allowing people to take their state pension sooner, perhaps at age 63, at a reduced amount to reflect that it will be paid for longer, and to mirror the option of taking it later in exchange for an uplift.

He notes: ‘There would be a need for some checks and balances to make sure people don’t end up with an income from state and private pensions combined below the means-tested benefit threshold.

‘But with some creative thinking, solving this shouldn’t be insurmountable and could be well worth the prize if it helps more people in the uncertain times ahead with a flexible transition into retirement.’

Life expectancy varies widely between regions, social groups and occupations

Former Pensions Minister and campaigner Ros Altmann believes that there is a strong case to allow early access to state pensions, because healthy life expectancy across the country varies by around 20 years.

Meanwhile, Covid-19 has caused many over-60s to lose their jobs, damaged their health or forced them into caring for loved ones, she says.

‘The average life expectancy masks an enormous difference between regions, occupations and social groups.

‘Those who can afford to wait beyond age 66 or who are physically fit and want to keep working, are able to delay their state date and receive a higher pension.

‘But no allowance is possible for those in the poorest health, with no other income and unable to work, to draw even a reduced amount sooner.

‘I would prefer to see a band of ages whereby those who need it can access their state pension sooner, subject to minimum contribution requirements and other assessments.’ 

Many of those taking the early option could be the better off

‘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,’ says former Pensions Minister Steve Webb in a column for This is Money. 

Replying to a grounds worker, who was struggling to manage his job at age 52, he explains: ‘By European standards our state pension is quite low compared with the national average wage.

‘If you live in a country where the state pension is a decent proportion of average income then even if you get a reduced rate because you have drawn it early you can probably still afford to live on the reduced amount.’

He compares 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.

Apart from any annual upratings in line with inflation, this amount would not be increased for the rest of your life, because the Government could not allow you to claim pension credit to top it up, explains Webb.

This is because otherwise, lots of people with a low income would claim their state pension early, benefiting from extra years in payment and then immediately claim a top-up as soon as they were old enough to get pension credit, he says.

‘In other words, the main people who would benefit from being able to take a pension early are those who have other income and are generally better off, but it could leave those who have limited means to struggle on a very low income for the rest of their retirement,’ writes Webb in his old column.

Speaking on the topic now, he adds: ‘This option might look attractive today, but I’m not sure how it would work to be paying older pensioners in years to come at a rate below the poverty line but refusing to top them up because they started drawing their pension early.

‘In practice, I suspect many of those who took an early option would be better off people who had private income to top up their state pension, who aren’t really the target market.’ 

A universal state pension age is simple and clear

‘Government committed in legislation to undertake a review of state pension age every six years, to ensure that the state pension system protects current pensioners, and is affordable, sustainable and fair,’ says a Department for Work and Pensions spokesperson.

‘Allowing early access to the state pension on a reduced basis could risk leaving people with an inadequate pension while a universal state pension age provides simplicity and clarity which helps people plan for their retirement.’