A cut in pension tax reliefs in the Budget risks a loss of £50 billion from UK pension funds over the next five years, threatening long-term investment in British businesses as well as the retirement outcomes for millions, according to Rathbones, one of the UK’s leading wealth and asset management groups.
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 for the Budget.
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. Even conservatively assuming a much smaller effect than the one seen in Denmark to UK higher-rate taxpayers, Rathbones estimates that pension inflows could fall in the UK by more than £50bn over five years if the relief is cut from 40% to 25%.
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 8 million people, including the likes of experienced nurses and teachers, into higher-rate tax brackets. According to the Government’s own statistics, retirees in 2050 are on track to have 8% less private pension income than retirees today; reducing reliefs would only compound that problem.
Oliver Jones, Head of Asset Allocation at Rathbones and lead author of the analysis, 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.”
Instead, Rathbones urges policymakers to prioritise policies that support savers, encourage business growth, and deliver investment where needed most. The firm calls for a stable, predictable policy environment to give individuals and businesses the confidence to invest for the future.
Malvee Vaja, Financial Planner at Rathbones, said: “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 provides financial planning and investment advice to private individuals across the UK, through 21 offices. The firm has already noted rising concern from many of its clients about the prospect of a restriction in tax reliefs on pension saving, with a rise in requests to withdraw the maximum tax-free amount currently allowed from pension pots.
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