Pensions Commission could end cycle of Budget tax speculation

In its Budget submission to the Chancellor, Pensions UK said it recognised the Government is focused on increasing revenue to fund public services and stabilise the economy. However, it warns that 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 pension pots.

Recent experience shows that even speculation about changes to the tax-free pension lump sum allowance has triggered a dramatic surge in pension withdrawals. Data from the Financial Conduct Authority showed that in the 2024/25 financial year, UK pension savers withdrew a record £18.08 billion in tax-free lump sums - a 61% increase on the previous year. In just the six months up to March 2025, withdrawals soared to £10.4 billion, up 72% compared to the same period a year earlier.

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 both individual savers and the wider economy.

Previous analysis by Pensions UK found 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.

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. The five principles are:

• Promotes adequacy: provides financial support and incentivises saving for retirement.
• Encourages the right behaviours: helps savers make the right decisions about retirement saving.
• Fair: helps everyone – the employed and the self-employed - save for retirement.
• Simple to adopt and administer: avoids unreasonable transition and on-going costs for employers and schemes.
• Enduring and sustainable: designed to avoid repeated change and so builds confidence in long-term saving.

Zoe Alexander, Executive Director of Policy and Advocacy at Pensions UK, said: “Many people are not saving enough for their retirement and tax relief acts as an important incentive to help people save.

“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.

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.”

Click here to read the full submission.

ENDS

Mark Smith, Head of Media Relations
020 7601 1726 | [email protected]

Cali Sullivan, Senior PR Manager
020 7601 1761 | [email protected]