Calum Cooper, Head of Pensions Policy Innovation at Hymans Robertson, comments on how pension tax changes could boost the UK's growth.

Changing the way pensions are taxed can increase the amount the Government can invest into UK growth by over £20 billion a year, adding up to £100 billion over 5 years, according to analysis by Hymans Robertson in ‘A Pensions Plan for the New Government’. This could be done through reducing upfront tax relief on pensions, and then making pensions at the point of retirement tax-free.  The tax relief provided over time would remain the same, and the level of expected net income received by pension scheme members could stay the same when they retire. Through this, the government would gain billions of pounds from tax on pensions contributions right now, but individuals won’t lose out as they would not be paying tax on their pensions later in life.

Calum Cooper, Head of Pensions Policy Innovation, Hymans Robertson:

For every pound a typical worker, paying basic rate tax, saves, 20p is tax relief. Put another way, when a typical worker gives up £800 of take-home pay to save into a pension, the Government effectively tops it up by £200. This tax relief is an incentive for the worker to save...

Instead of offering tax relief on pension contributions and providing this £200 incentive - and then clawing £150 back in retirement - the Government could simply give the net £50 incentive-‘Government Bonus’ - that the worker retains as an up-front top-up payment (through tax relief or another mechanism). After this pension savings could be completely tax-free.

This can be designed so that the expected pensions cash and income received is unchanged. The £150 of upfront tax adds up to more than £20bn p.a. of extra income to the Government now, rather than decades in the future. Provided this is invested in the UK, and for green growth there is alignment with the interests of future generations too. This could materially accelerate much needed investment in the UK and could keep expected pension income at retirement and take-home pay unchanged without costing anything more for employers. Because future pensions would be tax free, it would make it simpler and more certain for people to plan for later life.

Full release: Pensions tax change could unlock over £100 billion for UK growth

✉️ Rowena Swatton, Hymans Robertson, rowena.swatton@hymans.co.uk