Chancellor Rachel Reeves faces stark warnings that proposed reforms to pension tax relief could drain £50billion from Britain’s retirement savings within five years, new analysis has found.

Implementing a uniform 25 per cent tax relief rate would significantly discourage pension contributions, particularly among higher earners who currently benefit from more generous allowances.

Oliver Jones, head of asset allocation at Rathbones and the report’s author, cautioned: “Policymakers should consider the wider consequences before making changes that could drain £50billion from the UK’s investment engine.”

The analysis from wealth management firm Rathbones suggests such reforms would have far-reaching implications for retirement security across the nation.

Under the current system, pension savers benefit from tax relief matching their income tax bracket – 20 per cent for basic rate taxpayers, 40 per cent for those earning above £50,270, and 45 per cent for individuals with incomes exceeding £125,140.

The proposed reforms would replace these tiered reliefs with a uniform 25 per cent rate for all savers, regardless of income level.

This approach has notable support, including from Pensions Minister Torsten Bell, who advocated for similar measures before entering Parliament.

The Resolution Foundation, which Bell previously led, recommended a 25 per cent flat rate in 2016.

Ms Reeves herself previously supported a 33 per cent uniform rate whilst serving as a backbencher, highlighting the political momentum behind such reforms.

The wealth management firm’s research reveals that implementing these changes would trigger a 10 per cent decline in pension contributions from affected savers.

This reduction would strip pension funds of vital capital needed for investing in British companies, innovation projects and infrastructure development.

Mr Jones warned: “The long-term consequences could be severe: undermining business investment, weakening retirement security, and ultimately slowing economic growth.”

LATEST DEVELOPMENTS:

• Income tax could be hiked in Rachel Reeves raid despite Labour promises as Budget looms
• Rachel Reeves floats energy tax U-turn on North Sea oil ahead of Budget
• Bank of England issues update for anyone with a mortgage as Rachel Reeves eyes new property tax

The analysis contradicts government initiatives aimed at channelling pension investments into UK assets, including the Mansion House Accord and the Pension Schemes Bill.

Malvee Vaja, financial planner at Rathbones, stated: “For individuals planning for retirement, the proposed changes to pension tax relief could mean significantly lower pension pots; it could even mean many rejecting pensions entirely.”

The Chancellor faces mounting fiscal challenges, with borrowing costs rising and economic growth remaining sluggish, prompting speculation about potential tax increases in the November Budget.

Treasury officials estimate the financial shortfall at approximately £30billion, intensifying pressure to identify new revenue sources.

Beyond the flat-rate proposal, Ms Reeves is reportedly considering reducing the tax-free lump sum withdrawal threshold, which currently permits savers to access 25 per cent of their pension without tax, capped at £268,275.

Critics argue these measures would prove particularly unjust to individuals who have structured their retirement planning around existing regulations.

Ms Vaja emphasised: “People should be incentivised to save for later life so they can live from their own resources. Further cuts in pension savings relief will achieve the opposite.”