The Pensions Commission could offer an opportunity to end the cycle of damaging tax speculation by creating a long-term plan to ensure the pension system remains appropriately incentivised, targeted and affordable, Pensions UK has argued.

Recent speculation around potential pension tax changes has continued to grow in recent weeks, with the sharp rise in UK government borrowing creating a fiscal squeeze that DeVere Group chief executive, Nigel Green, warned could make a tax raid on pensions in next month’s Budget increasingly likely.

Indeed, Green said that the current economic situation had "set the stage for a politically risky and economically damaging move against pension savings," warning that "when the Treasury finds itself under this kind of pressure, pensions are often first in line".

"They’re seen as an easy source of revenue that can be tapped quickly, even if the long-term consequences are severe," he admitted.

In its submission ahead of the Budget, however, Pensions UK warned that while the government is focused on increasing revenue to stabilise the economy, making tactical changes to address short-term fiscal concerns threatens to erode trust in the retirement savings system, leading people to make premature and potentially detrimental decisions about their pensions.

Indeed, there has been growing concern over the impact of policy speculation ahead of the Budget, after data from the Financial Conduct Authority (FCA) revealed a significant increase in the amount of money being withdrawn from pensions, with a particular "surge" seen in those accessing large pension pots.

The figures showed that in the 2024/25 financial year, UK pension savers withdrew a record £18.08bn in tax-free lump sums, marking a 61 per cent increase on the previous year.

The potential impact of this was also made clear after HMRC and the FCA shared a joint statement, clarifying the interaction between tax legislation and regulatory rules on pension cancellation rights, confirming that taking a pension lump sum is not classed as a cancellable contract.

In addition to the potential impact on savers, Pensions UK warned that a rush to pension withdrawals would reduce assets under management and the capacity of pension funds to invest in growth assets, with negative consequences for the wider economy as well as individuals.

This also builds on previous analysis by Pensions UK, which found that no single reform of the current system is perfect and most reform options for pensions taxation would leave many people with lower pension savings and create very substantial cost and complexity for employers and occupational pension schemes.

Given this, the association said that, if the government does choose to introduce a reform, it should consider Pensions UK’s ‘Five Principles for Pensions Taxation’ report and to consult extensively to avoid unintended consequences.
 
“We understand that reforming pensions tax relief could be seen as an immediate source of additional revenue. But we would urge the government to focus instead on creating a long-term plan to ensure the pension system remains appropriately incentivised, targeted and affordable," Pensions UK executive director of policy and advocacy, Zoe Alexander, said.

"Further, unchecked speculation around tax relief risks consumer harm. Savers need certainty and stability to maintain overall trust in the pensions system.

“The Pensions Commission provides an opportunity to reconsider the place of pensions within the social and economic fabric of the UK, and how the load of saving should be shared between savers, employers and government.”

Green agreed that whilst the Chancellor is facing difficult choices, targeting pensions would be counterproductive.

“Undermining confidence in long-term saving would push future generations to rely more heavily on the state, not less," he stated, continuing: "It would choke off investment flows into British industry that come from pension funds, weakening the country’s growth potential just when it needs to be strengthened.

“When governments shift the goalposts too often, capital goes elsewhere.”

“Rachel Reeves faces the toughest Budget of her career, but raiding pensions would be a serious error. Britain’s fiscal credibility depends on encouraging saving and investment, not punishing them.

"The Chancellor must resist the short-term temptation to squeeze retirees to fix long-term structural issues. Once trust in the system is broken, it’s almost impossible to rebuild.” 

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