Goldman Sachs Warns of Potential Pension Tax Relief Cuts in UK Budget

Goldman Sachs has issued a warning about potential changes to pension tax reliefs in the upcoming UK Budget, scheduled for October 2024. The Wall Street bank suggests that Chancellor Rachel Reeves might need to increase taxes by £15-20 billion, with pension reforms likely to be a significant target.

The investment bank proposes that implementing a flat 20% tax relief rate on pension contributions could address £15 billion of the UK's financial deficit. This change would effectively eliminate the additional relief currently available to higher earners, who presently enjoy a 40% tax relief on their pension contributions.

The UK pension system, established in 1908, has undergone numerous changes over the years. In 2023, the state pension age was 66 for both men and women, with the system operating on three pillars: state pension, workplace pension, and private pension. The country's pension assets totaled approximately £2.5 trillion in 2022, highlighting the significance of any potential reforms.

Reeves has previously expressed interest in reforming pension tax relief. In a 2016 article, she advocated for a flat rate of 33% tax relief, describing it as "a welcome boost for basic-rate taxpayers and a cut in the savings subsidy for higher earners." She argued that such a change would simplify the system and make it fairer while encouraging retirement savings.

"It would be simpler, fairer and an important step towards boosting retirement savings... This would be a welcome boost for basic-rate taxpayers and a cut in the savings subsidy for higher earners, while still rewarding savings."

The Labour Party, led by Sir Keir Starmer, faces the challenge of balancing fiscal needs with their campaign promises. While they have ruled out increasing taxes on "working people," which is generally interpreted to exclude rises in income tax and national insurance, the party leader has acknowledged that the upcoming Budget may be "painful."

Goldman Sachs suggests that other potential tax changes could include reforming capital gains tax and altering inheritance tax reliefs. These measures, combined with pension tax relief reforms, could help address the £22 billion deficit in Britain's finances.

It's worth noting that the UK's pension landscape has seen significant changes in recent years. Auto-enrollment in workplace pensions was introduced in 2012, and pension freedoms were implemented in 2015, allowing more flexible access to pension savings. Despite these reforms, the UK still has one of the lowest state pensions among developed countries relative to average earnings, and approximately 12 million people were estimated to be under-saving for retirement in 2022.

As the number of people aged 65 and over in the UK is projected to increase by 40% between 2022 and 2042, the pressure on the pension system is likely to grow. Any changes to pension tax relief will need to balance the government's fiscal needs with the long-term sustainability of the UK's retirement savings landscape.