Any cut to pension tax relief in the Budget risks a loss of £50bn from UK pension funds over the next five years, threatening long-term investment in British businesses as well as the retirement outcomes for millions.
This is the verdict from Rathbones, ahead of chancellor Rachel Reeves’ second Budget on Wednesday 26 November.
An economic analysis conducted by Rathbones’ investment research team examined the likely effects of replacing higher-rate (40%) and additional-rate (45%) pension tax relief with a flat rate of 25%, a change favoured by pensions minister Torsten Bell before he entered politics and reportedly under consideration.
Drawing on international evidence and UK-specific data, the research concluded this would significantly reduce incentives for people to contribute to their pensions, resulting in a sharp drop in overall contributions.
The analysis considered detailed data from Denmark, where a similar reduction in pension tax relief led to a large drop in overall pension saving by affected individuals.
Rathbones added that this reduction would mean less capital available for UK companies, infrastructure and innovation, at a time when investment-led growth is critical to the country’s economic prospects and when the government is otherwise trying to encourage investment in the UK from pension funds with its Pension Schemes Bill.
Cutting pensions tax relief would also significantly harm the retirement outcomes of millions, especially now that frozen tax thresholds have pushed over eight million people into higher-rate tax brackets, Rathbones argued.
According to the government’s own statistics, retirees in 2050 are on track to have 8% less private pension income than retirees today, and Rathbones believes reducing reliefs would only compound that problem.
Rathbones head of asset allocation, Oliver Jones, said: “Our research raises urgent questions over the likely impact of further pension reform.
“It shows that cutting higher-rate pension tax relief could have a profound impact on long-term investment in the UK.
“Pension funds are a vital source of capital for British businesses and reducing incentives to save risks undermining both future retirement incomes and the country’s growth prospects.
“Policymakers should carefully consider the wider consequences before making changes that could drain £50bn from the UK’s investment engine.
“As the government faces mounting fiscal pressures and seeks new sources of revenue, it would do well to remember that while reforming pension tax relief may offer short-term savings for the Treasury, the long-term consequences could be severe: undermining business investment, weakening retirement security and ultimately slowing economic growth.”
Rathbones financial planner, Malvee Vaja, added: “For individuals planning for retirement, the proposed changes to pension tax relief could mean significantly lower pension pots; it could even mean many rejecting pensions entirely for their retirement saving.
“We’re hearing from many higher earners anxious about this and reconsidering how much they save, potentially leaving themselves and future generations less secure in retirement.
“At a time when the onus is increasingly on individuals to build up a big enough pension pot, people should be incentivised to save and invest for later life so they can live well from their own resources.
“There is a risk that further cuts in pension savings relief will achieve the opposite.”
Rathbones is urging policymakers to prioritise policies that support savers, encourage business growth and deliver investment where needed most.
It is calling for a stable, predictable policy environment to give individuals and businesses the confidence to invest for the future.
