Baroness Altmann, a cross-bench member of the house of Lords lays it on the line. If we want UK income tax relief we need to invest our pension money in Britain. She ominously warns this especially is a threat to higher rate relief.
Some commentators are strongly opposed to the idea of the government driving more pension support for UK growth assets.
Britain urgently needs more long-term investment to boost the economy, and all other leading nations’ pension funds overweight their domestic markets. Yet the Times Money columnist Robin Powell wrote last week that the state would be wrong to ask pension funds to increase domestic asset exposure. I must respectfully but profoundly disagree.
Those arguing against higher UK pension allocations fail to factor in the fact that taxpayers fund tax relief of more than £70 billion a year to supplement individual or employer pension contributions. This massive public expenditure exceeds annual spending on defence (about £60 billion), transport (about £45 billion) or the police (about £30 billion).
There is also tax arbitrage, where pension contributions get relief at your highest marginal rate but only pension income above the higher-rate thresholds in retirement faces higher-rate tax, with most pensioners being basic-rate taxpayers.
It seems to me that there is clear justification to expect those getting such expensive exchequer subsidies to invest more of their contributions at home, to benefit UK growth and build a better Britain for their future and for the rest of society.
My recommendation is that the government should require at least, say, 25 per cent of new contributions to be invested in domestic risk assets.
This is not mandation. It is using tax incentives more effectively to boost British growth and business prospects. If pension managers want to invest more than, say, 75 per cent of their fund abroad they can, they just won’t have the government money added. This obviously changes the expected return calculations, while leaving managers free to choose what to buy in their members’ best interests.
This policy proposal would help to reverse the vicious cycle created by the selling of domestic assets by pension funds, which drove British market underperformance, reduced valuations and left companies struggling to find equity finance at a reasonable cost. Many have had to take on debt or seek funding and listings overseas — or have been left vulnerable to takeovers on the cheap by foreign competitors.
Using tax relief to incentivise higher UK investments, and much needed infrastructure and housing, would revive the reliable long-term investment base we have lost and which other countries’ pension investors provide for their economies.
Restoring regular pension fund flows can become a virtuous circle, unwinding the devaluation created by past pension selling. At no additional Treasury cost this would boost British equity markets, start-ups, scale-up businesses, infrastructure and housing, which are crucial to future economic success.
Alternatively, if such huge amounts of public money continue to flow away from the UK, I suspect that the calls to remove or reduce tax reliefs (especially higher-rate reliefs) will grow.