A cut in pension tax reliefs in the budget risks a loss of £50bn from UK pension funds over the next five years, according to asset manager Rathbones.
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.
“Our research raises urgent questions over the likely impact of further pension reform,” said Oliver Jones, head of asset allocation at Rathbones and lead author of the analysis. “It shows that cutting higher-rate pension tax relief could have a profound impact on long-term investment in the UK.”
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