State pension should be paid early to those in poor health, using underwritten annuity providers to deliver better value, Hargreaves Lansdown claims ahead of publication of the interim report from John Cridland’s review of the state pension age.
Responding to the review, the first report of which is expected on Thursday, Hargreaves Lansdown has proposed that access to state pension be given from age 60 for those in poor health, with state pension to be expressed as both an income from State Pension Age (SPA) and a capital sum if accessed ahead of SPA, that would be discounted to take account of early access. Individuals could then use the capital sum to purchase an annuity from an enhanced annuity provider, giving a higher income than the state pension. Under Hargreaves Lansdown’s proposal individuals would only be able to use the early access facility if it produced a higher rate of income than their full state pension.
The firm says the cost of providing an individual expecting a state pension of £160 per week from age 67 would be around £275,000 if provided on the open market. If the state were to offer the option of a lump sum at age 62 of £165,000, an individual in poor health could get £175 a week from an enhanced annuity provider.
However, Hargreaves Lansdown accepts that the policy would create an up front strain on public finances, as decades of pension payments would be handed over on a single day, and that by paying off those with short lifespans at ‘fair value’, it would be left with a core of retirees with greater longevity that would be more expensive, on average, to fund.
Hargreaves Lansdown head of retirement policy Tom McPhail says: “The state pension age needs to rise, in order to reflect general improvements in life expectancy across the population, because otherwise the whole scheme will eventually become unsustainably expensive. However we also need to accommodate those with poor life expectancy. We could vary the state pension based on gender, post code, occupation or even ethnicity but these are both arbitrary and in some cases illegal because they are discriminatory. A fairer and more efficient approach would be to use the underwriting expertise of specialist annuity providers, to target higher payouts to those individuals who have a lower life expectancy, whatever the reason for it.”