A cut in pension tax reliefs in next month’s Budget risks a loss of £50 billion from UK pension funds over the next five years, according to Rathbones.
Economic analysis carried out by the wealth manager examined the likely effects of replacing higher rate and additional rate pension tax relief with a flat rate of 25%.
The research concluded this would significantly reduce incentives for people to contribute to their pensions, resulting in a sharp drop in overall contributions.
Rathbones said the analysis considered 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, Rathbones estimates that pension inflows could fall in the UK by more than £50 billion over five years if the relief is cut from 40% to 25%.
Cutting pensions tax relief would also harm the retirement outcomes of millions, particularly now that frozen tax thresholds have pushed over eight million people into higher-rate tax brackets, the firm said.
Additionally, a reduction would mean less capital available for UK companies, infrastructure and innovation.
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. 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 has urged policymakers to prioritise policies that support savers, encourage business growth and deliver investment and create a stable, predictable policy environment.
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.”
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