Pension tax relief worth more than £50bn should only be offered to savers who are prepared to invest in Britain, according to Andy Haldane, the president of the British Chambers of Commerce.
There should be a “home bias” that directs retirement savings into UK businesses, closing a funding gap that hampers the growth of small- and medium-sized businesses, he said.
Speaking at the annual BCC conference in London, Haldane said radical measures were needed to provide startup companies with the capital they needed to grow.
The former Bank of England chief economist, who has been mentioned as an adviser to Andy Burnham, is expected to push for the proposal to be the centrepiece of a new economic plan.
Pension tax relief tops up savings into regulated personal and occupational retirement funds at the marginal rate of tax. It is estimated that higher rate (40%) and additional rate (45%) taxpayers are the biggest gainers from the system while those on low incomes and unable to save in a pension are excluded.
Haldane said there was a gulf between the needs of companies and the capital available, even though the international financial system was awash with money looking to find a home.
He said: “Unfettered free markets have not worked. That is a lesson of the last 30 years.”
Ministers had recognised the need to intervene, but the measures adopted so far, including the launch of the National Wealth Fund, were making a modest impact, Haldane said.
And so the government should adopt radical reforms of the tax system because there were “trillions of pounds available for investment”.
Haldane said the British pension system was an obvious place to look, because it was the only one in the world that did not have a home bias.
The plan would force retirement schemes to channel funds into UK companies as the price of pension tax relief, avoiding the need to deploy taxpayer funds, he said.
“Is there a third way, something that shifts the balance of incentives towards British businesses, while leaving those choices [of exactly what to invest in] in the hands of asset managers and there owners?” Haldane asked. “As luck would have it we do. It’s our taxation system, which the perfect vehicle.
“The government extends more than £50bn in pension tax relief and more than £10bn in tax relief for ISA’s.”
These reliefs are made without any rules forcing investors to channel funds into UK companies.
Haldane said an obligation attached to pension tax relief would not be “about constrained choices” but “about having a home bias”.
He added that surveys showed 70% of households would like their savings to be invested in UK firms.
The chancellor, Rachel Reeves, has suggested forcing pension schemes to devote a proportion of their funds to UK investments, but pulled back from mandating them in the Pension Schemes Act 2026.
City firms lobbied vociferously against proposals for “mandation clause” during the consultation period before the bill became law.
Haldane characterised British business and British capital owners as “true thoroughbreds” that need to be brought together.
There were no details from Haldane about how to develop new tax rules, which could take years to agree with the pensions industry.