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 some think could make pension tax changes in next month’s Budget increasingly likely.

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after data from the Financial Conduct Authority (FCA) revealed a significant increase in the amount of money being withdrawn from pensions, with a particular "surge" seen in those accessing large pension pots.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.”

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