New state pension proposal highlights challenges for younger workers

Hot on the heels of Tony Blair’s think tank’s controversial proposals for state pension reform, the Social Market Foundation (SMF) is now floating another radical policy change: the Citizens Advance.

One of the Tony Blair Institute’s proposals was to make state pension payments more flexible and allow people to take them early if they wish. The SMF takes that idea a significant step further.

It suggests letting even younger people take the first year of their state pension as a cash lump sum to help with significant purchases such as buying their first home.

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How the Citizens Advance could work

The idea, which was originally put forward by the Labour MP Andrew Lewin, would give younger adults who have made 10 years of national insurance contributions, the ability to take the first year of their state pension income as a cash lump sum (currently around £12,500).

Those who take up the offer would then see the date that they become eligible for the state pension pushed back by one year. However, depending on the design of the Citizens Advance, there could, potentially, be an opportunity to buy back the missed year at a later date.

The cost of the policy is estimated to be £1.3 billion in year one, but the actual figure would depend on whether the payment is taxed, eligibility and whether there would be any restrictions on how the lump sum is spent.

A state alternative to the Bank of Mum and Dad

The thinking behind the policy is to provide a state alternative to The Bank of Mum and Dad and help tackle wealth inequality.

It’s anticipated that some £5.5 trillion will be passed on to younger adults by the Silent Generation and Baby Boomers over the next 20 years as part of the so-called Great Wealth Transfer.

But while that money could help many younger people take that difficult first step on the property ladder, pay off debts or ease other financial pressures, the SMF says that only a third of adults currently anticipate an inheritance at some stage in their life.

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And despite research from Yorkshire Building Society suggesting that the Bank of Mum and Dad provided a staggering £10 billion in home finance in 2024, nearly half of those who are yet to buy a home (44%) do not expect any financial support from either their family, or their partner’s when the time comes.

Helping build financial resilience in Millennials and Gen Z

The SMF report said it’s a parlous time for younger people.

Office for National Statistics (ONS) data shows that cost-of-living pressures weigh heaviest on 16-29-year-olds, with 96% of them citing it as their biggest concern, ahead of other issues including the NHS, the economy, international conflict, and crime.

But they are trying to build their financial resilience. Between the ages of 25 and 40, the biggest financial priority was working on their emergency savings fund, followed by repaying debt and saving for a house deposit.

The fourth-biggest concern was saving into a pension.

Taking positive action

The report paints a pretty bleak picture of the challenges facing younger people; there are no easy fixes.

But there are some simple things that people who are still at the earlier stages of their working life can do to try and balance their pressing short-term financial concerns with the need to save for retirement. And some of them won’t cost a penny.

• Make saving automatic

Saving takes discipline and willpower. If that’s coming between you and any of your savings goals, explore ways to make it automatic. Setting up a standing order for a fixed payment into a savings account is a good start, but there are also plenty of apps that automate saving for you. By using open banking to link up to your current account, they analyse your income and expenditure, work out how much you can afford to save and pay it into a linked account on your behalf.

• Don’t opt out of your workplace pension

So long as you meet a few basic requirements, you’ll be automatically enrolled on to a pension at work. Your employer will pay in at least 3% of your qualifying earnings – currently the range between £6,240 and £50,270 – then you’ll top that up to 8% (the minimum contribution).

You can opt out if the payment feels like a stretch, but it’s important you don’t take up this opportunity, unless you really can’t afford it.

Opting out literally involves turning down free money. Not only will you miss out on your employer’s contribution, you’ll lose tax relief on your contribution too. This is a top-up from the government that effectively rebates the tax you would have paid on your contribution.

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As such, it only ‘costs’ basic rate taxpayers £80 to pay £100 into their pension, or £60 for those who pay tax at the higher rate.

Some employers will also pay more than the minimum into your pot.

• Pay work bonuses into your pension

When you’re paid a work bonus it will be taxed just like your income. So, for higher-rate taxpayers in particular, tax can take a big chunk out of your windfall.

But, if your employer can pay your bonus straight into your pension, you’ll get the full value of your bonus without paying tax or national insurance (NI).

The rules around salary sacrifice are changing in April 2029. After that date, the amount you can pay into your pension and still save NI will be capped at £2,000 a year. But you’ll continue to make the full saving on income tax, so it will still be worthwhile. Plus there’s still three tax years to take advantage of the system as it stands.

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It’s not easy to resist taking your bonus – even when you take the tax benefit into account – especially if you’re saving for a house deposit. 

But if you’ve already reached that particular milestone and you’re not dealing with costly credit card debts, it’s among the savviest financial decisions you can make.

• Consolidate your pensions

If you’ve been working for a while, you might already have built up a handful of workplace pensions. Over time they can become tricky to keep track of, not to mention, manage.

One way to take control is to consolidate the pensions you’re no longer contributing to into a self-invested personal pension (SIPP). Then, each time you change jobs, you can transfer that pension into your SIPP.

With a SIPP, you’ll need to choose where your money is invested – there won’t be a default fund as there is with workplace pensions. Nonetheless, good SIPP providers should give you guidance and offer recommendations for sensible core holdings if you don’t want to build a portfolio yourself. Or, some providers will even offer ready-made portfolios (managed pensions) based on your attitude to risk that are run and monitored on your behalf.

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Using this approach, it will be far easier to see how much you have saved for retirement and make any changes that may be necessary over time. But a less obvious benefit is that it can actually boost the value of your savings too. That’s because the charges on SIPPs might be lower than workplace schemes, meaning you get to keep more of your investment returns.

You just need to check for fees and make sure you won’t lose any valuable guarantees on transfer (although these are less common with newer pensions).

• Review your investments

You may also be able to boost the performance of your workplace pension by reviewing your investments.

Most people don’t choose an investment fund when they join their workplace pension and instead go into the default fund.

This approach is great in so far as it makes pension saving easy, but the strategy for default funds can be pretty cautious and their performance, for some savers, lacklustre.

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But most pensions will offer a choice and you might be able to add a bit more oomph to your pot by selecting a better-performing fund.

While it’s important not to take too much risk, many savers can justify turning up the dial a bit – especially if they are still a long way from retirement and have time to ride out any volatility in the short term.