Pension tax capture could threaten the retirement of millions of people

Thursday 30 October 2025 12:01
| Updated:

Wednesday 29 October 2025 15:27

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A potential raid on pension funds in next November’s Budget could cause pension funds to lose billions of dollars, threatening businesses and pension outcomes for millions of Britons.

UK pension funds could lose £50 billion over the next five years if the Treasury decides to cut pension tax relief, according to analysis from wealth manager Rathbones.

Savers can contribute up to £60,000 to their pension each financial year without being taxed, attracting people to increase their savings without fear of losing their capital.

However, changes to the system are reportedly being considered, including changes favored by Pensions Minister Torsten Bell before he entered Parliament.

This includes cutting the additional tax relief rate from 40 percent for higher rate taxpayers, to a flat rate of 25 percent.

Rathbone’s analysis found that this move would significantly reduce the incentive for people to top up their pensions, ultimately leading to a sharp drop in contributions and impact on the UK economy.

Malvee Vaja, financial planner at Rathbones, said: “For individuals planning to retire, the proposed changes to pension tax relief could reduce the size of their pension fund significantly, and could even mean denying them a pension plan entirely for their retirement savings.”

Retirement plan

Cutting tax breaks would have a chilling effect on the government’s push for pension funds to be used to stimulate economic growth and increase returns for savers.

Both the Mansion House Accord, under which pension providers agreed to invest a higher percentage of their funds into UK assets, and the Pension Schemes Bill aim to increase investment into pension funds.

But Rathbones argued that reducing aid would reduce the availability of capital for UK companies, innovation and infrastructure, which are seen as vital to the country’s economic prospects.

It could also significantly harm a large number of Britons’ pension plans, especially as the frozen income tax threshold, at £12,570, has pushed more people into higher rate tax brackets, limiting their tax relief.

Oliver Jones, head of asset allocation at Rathbones, said: “Cutting pension tax relief at a higher rate could have a major impact on long-term investment in the UK.

“As the government faces growing fiscal pressures and looks for new sources of revenue, it is worth remembering that while pension tax relief reform may offer short-term savings for the Treasury, the long-term consequences could be dire.”