18 JUN 2025

Reaction to the UK Public Spending Review

By IFGL Pensions Technical Manager Steve Berridge

UK Pensions – deckchairs on the titanic or a lifeboat on the way.

The Government announced its Spending Review yesterday and the pension industry was listening keenly for news of any more legislation coming down the track, following on from the autumn budget which proposed that from 2027 most pensions would fall within the scope of UK inheritance tax for the first time.

In the event, what we got was reference to the Pension Schemes Bill (yes another pension related bill) and The Government’s intention to automatically consolidate small pots worth £1,000 or less and create mega funds of at least £25 billion. 

The chancellor is one step closer to forcing UK pension funds to turn into something similar to the megafunds of Australia and Canada. The plan is for default schemes to get to around £25 billion by 2030. This will itself be interesting as currently of the 33 master trusts, only three are that size.

The Government of course has a huge challenge in trying to increase UK investment, with so much of the UK’s infrastructure suffering from years of neglect and the chancellor is eyeing up large pension schemes as a means of unlocking some of this investment.

The consolidation of small pots is welcome news, as the introduction of auto enrolment in 2012 has brought with it an increase in small workplace related pension schemes, as employees move around from job to job.

This aside, there is a feeling that some of these changes are avoiding the big issue which in the UK is a real lack of adequate pension provision. Put simply, millions of people are just not saving enough for their retirement.

Here the current uncertainty surrounding the pension taxation and relief system is doing possibly irreparable damage. Rumours have abounded for months now (not helped by the recent leaked memo from Angela Rayner) that the Government is looking to reintroduce the life-time allowance. There was also speculation before the October budget that the tax-free cash allowance might be reduced or removed altogether. This is before we get to the change announced for 2027, bringing pension pots within the scope of inheritance tax.

All of this is damaging the perceived attractiveness of pension saving, as investors consider alternative saving options. Which of course is a real shame, because a contribution to a UK pension can be incredibly tax efficient.

Unless it wants an armageddon type situation 10-20 years from now of an increasingly elderly population needing state bail outs simply to exist, this Government and any successors need to think hard about how to promote pension saving. The pensions bill and the FCA’s value for money initiatives are all welcome, but something more fundamental needs to change.

With the Government committed to huge amounts of public spending against a backdrop of likely future tax rises, the current situation in the UK pensions and investment sphere would appear to be somewhat perilous. Those of us working in the pension space will therefore be watching carefully as the Government’s planned changes unfold and hoping that it nurtures and doesn’t kill its golden goose.