Changing the way pensions are taxed could increase the amount the government can invest in UK growth by over £20bn a year, potentially adding up to £100bn over five years, analysis from Hymans Roberston has revealed.

Under the current pensions tax relief system, the government provides tax relief on pension contributions as an incentive to save in pensions, meaning that, for every pound a typical worker, paying basic rate tax, saves, 20p is tax relief.

However, Hymans Robertson pointed out that this pension money, including the £200 incentive, is then often invested overseas, meaning that when workers retire, the majority of the tax relief is expected to be "clawed back" by the government as most workplace pension income is taxed in payment.

"In fact, the typical worker who paid £800 into their pension will return £150 of their £200 ‘incentive’ to the government through tax," Hymans Robertson head of pensions policy innovation, Calum Cooper, pointed out.

"This leaves them with only £50 of extra money in their final pension pot.”

Instead, the firm’s report, ‘A Pensions Plan for the New Government’, suggested that the government should look to reduce upfront tax relief on pensions, and make pensions tax-free at the point of retirement.

This would mean that 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. This approach is not expected to impact company profits either.

According to Hymans Roberston, this would also see the government gain “billions of pounds” from tax on pensions contributions right now, whilst still ensuring that individuals don’t lose out as they would not be paying tax on their pensions later in life.

In particular, Hymans Robertson estimated that the £150 of upfront tax would add up to more than £20bn per annum of extra income to the government now, which it could look to invest, for example in the National Wealth Fund (NWF) and net-zero aligned sectors, and UK communities and growth.

"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," Cooper said.

"Because future pensions would be tax free, it would make it simpler and more certain for people to plan for later life.”

Cooper also pointed out that, provided this is invested in the UK, and for green growth, there is alignment with the interests of future generations too.

“If three times as much private sector capital is crowded in to the NWF as outlined in the Chancellor of the Exchequer’s current plans, this would lead to £80bn NWF investment a year,” Cooper pointed out.

“After a decade it could provide a NWF of more than £1trn,” he said, noting that this would positively impact the government’s debt-to-GDP position over the "critical" tax five-year time horizon, with a "material" state asset built up that would have otherwise been invested globally.

And whilst Cooper acknowledged that the scale of this long-term ambition is "enormous", he argued that it is achievable.

"To do this the communication and oversight would need a great deal of care. But we do not have decades to find the money to meet the UK’s investment and productivity needs, including the commitment to net zero," he stated.

“The dividend to the next generation from sustainably investing in the UK, done well, would be huge.

“This scale of change would need time to get operationally ready, and independent oversight and governance would be essential to ensure that value accretes fairly to the next generation. But all of this gives the NWF time to get to scale too.”

Hymans Robertson said that an extension of this idea could also see the government go further and underwrite and direct how circa £500bn of pensions savings, which is effectively deferred tax receipts, is invested.

The firm explained that as around £500bn of the current £2.5trn of pensions wealth is expected to be paid to government via tax on pensions in payment, it could be deemed reasonable that the government has a say on how this money, that is due to them in time, is invested.

However, Hymans Robertson acknowledged that this is an "even bolder and more politically ambitious" suggestion, suggesting that it is further than is needed or desirable.

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