Baroness Ros Altmann, who served in the role from May 2015 to July 2016, claimed the London stock market has been weakened by pension funds opting to invest overseas.
People get tax relief when they pay into their pensions at their marginal rate. When they take their pensions out, they can take 25 per cent of their savings as a tax-free lump sum, up to a maximum of £268,275.
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Altmann said: “Reversing this underweighting in pension fund UK exposure can help rebuild confidence in UK assets and markets more generally. This, in itself, could help boost growth, without additional Government expenditure.”
In her Mansion House speech in 2024, Rachel Reeves set out plans to force pension funds to combine into “megafunds”, saying they could unlock £80bn of investment in the UK.
Altmann has argued that in other countries, like Australia, Japan and Italy, more pension investments go into domestic markets.
She said that the situation in the UK, where funds underweighted investment in the UK, marked “a massive vote of no confidence by our pension funds in our own markets”.
How would Baroness Altmann’s reforms work?
Baroness Altmann’s proposed reforms would apply to new pension contributions, and existing money would not be part of the reform.
She said funds would be free to invest their money how they wished, but that the money in them would only be eligible for tax relief on the contributions if they invested 25 per cent or more of their cash into the UK.
The UK cash could be invested in equities, real estate, infrastructure or small and unlisted companies.
She said this would be a “condition of receiving the Government contribution to pensions”.
People get tax relief on their pension contributions at their marginal rate – so 20 per cent taxpayers get 20 per cent relief, higher-rate taxpayers get 40 per cent relief.
She added that for workplace pensions, any tax relief that was added to contributions would need to be paid back from the pension fund.
With a self-invested personal pension, the individual would have to pay the cash back.
Speaking to The i Paper, she said: “This makes tax relief a proper incentive to invest taxpayer funds at least to some extent here, rather than the money being used almost entirely to benefit other countries.”
Questions over how the proposals would work
Claire Trott, head of advice at St. James’s Place, said members’ needs should be the priority of pension schemes.
“Default funds within an auto-enrolment scheme would be the likely target for this type of compulsion to invest within the UK, but even then, the scheme trustees should be taking their members’ needs over and above anyone else’s, even the Government’s,” she said.
Baroness Ros Altmann served in the role from May 2015 to July 2016 (Photo: Simon Dawson/Bloomberg/Getty)David Robbins, senior consultant at Willis Towers Watson (WTW), said there were several questions over how Altmann’s proposals could work in practice.
“Tax relief is received at the point a contribution is made – so would defined contribution (DC) savers be barred from switching to non-compliant investments later, or would there be a mechanism for clawing tax relief back?
It is not the first time a politician has suggested a policy to encourage more investment in the UK.
Sir Tony Blair’s think tank said in 2023 that tax privileges could be conditional on 25 per cent of assets being invested in UK companies and infrastructure.
The Treasury has been approached for comment.
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