Marvin OnumonuCuts to pension tax relief could see UK pension funds lose £50bn over the next five years, threatening investment in British businesses and lowering retirement savings for millions, according to Rathbones.
The group’s investment research team looked at the impact of replacing higher-rate (40%) and additional-rate (45%) pension tax relief with a flat rate of 25%.
Rathbones used data from Denmark, where a similar change led to a sharp fall in pension saving.
Even using lower estimates than those seen in Denmark, the team found pension inflows in the UK could drop by more than £50bn over five years if relief is cut from 40% to 25%.
This would mean less money for UK companies, infrastructure and innovation at a time when investment is needed.
The report said cuts to pension tax relief would hit retirement savings for millions, including over 8 million people now pushed into higher-rate tax bands due to frozen thresholds.
Government figures showed retirees in 2050 are due to have 8% less private pension income than those retiring today, and lowering relief would make this worse.
Oliver Jones, head of asset allocation at Rathbones, 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.”
Jones added: “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 called for policies to support savers and business growth, and said stability would give people and companies confidence to invest.
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 savings.
“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.”
Vaja added: “There is a risk that further cuts in pension savings relief will achieve the opposite.”
