A proposal from Andy Haldane to link pension tax relief to investment in UK businesses has reopened one of the most important debates in British economic policy: should pension savings be used more actively to support national growth?
Haldane, the former Bank of England chief economist and current president of the British Chambers of Commerce, has argued that pension tax relief should only be available where savers are prepared to invest in Britain. His case is that the UK offers tens of billions of pounds of tax support to pension saving each year, yet too much of that subsidised capital is invested overseas rather than in domestic businesses.
The idea is politically and economically significant. It speaks to the UK’s long-running challenge of funding scale-up companies, infrastructure and productive investment. It also raises a sensitive question for millions of savers: should their pension pots be steered towards national priorities, or should they remain focused solely on achieving the best retirement outcome?
The answer is not straightforward.
The case for a UK investment bias
The argument in favour of Haldane’s proposal starts with a simple point. Pension tax relief is not just a private benefit. It is a major public policy choice.
The Government forgoes substantial tax revenue each year to encourage people to save for retirement. Official figures show the estimated cost of income tax relief on registered pension schemes at £33.5 billion for 2025/26, with a further £25.6 billion of National Insurance relief linked to pension contributions and benefits.
If public money is used to support pension saving, Haldane’s argument is that the public should receive a wider economic return. That could mean more capital for UK small and medium-sized businesses, more patient funding for growing companies, and a stronger domestic investment base.
This is not a new concern. Britain has often been criticised for being good at creating innovative companies but less successful at helping them scale. Promising businesses can struggle to access long-term growth capital, and some are sold to overseas buyers before they reach their full potential.
For supporters of reform, pensions represent one of the few pools of capital large enough to make a meaningful difference.
Why pension funds matter to economic growth
Pension funds are long-term investors by design. They collect contributions over decades and invest them to provide retirement income in the future. That makes them potentially well suited to assets such as infrastructure, private equity, venture capital, clean energy and long-term business growth.
The Government has already moved in this direction through the Mansion House agenda. The Mansion House Accord, announced in 2025, committed major defined contribution pension providers to an ambition of investing at least 10% of default workplace pension portfolios in private markets by 2030, with at least 5% allocated to UK private markets.
That approach is intended to deliver two outcomes at once: better long-term returns for savers and more investment into the UK economy.
Haldane’s proposal goes further. Rather than relying mainly on voluntary commitments, it would use tax relief as the lever. In effect, the state would say that tax-supported pension saving should help support British investment.
That is an attractive idea for policymakers looking for growth without increasing direct public spending.
The risks for savers
The counterargument is that pensions exist first to serve pension savers.
Most people do not contribute to a pension to finance industrial policy. They do so to fund retirement. Trustees, providers and asset managers have a duty to act in members’ interests, and that usually means seeking appropriate returns for an acceptable level of risk.
A stronger UK investment bias could create problems if it reduces diversification. Global funds give savers exposure to the United States, Europe, Asia and emerging markets, as well as to sectors that may be underrepresented in the UK stock market. Restricting or heavily incentivising UK allocation could leave savers more exposed to the performance of one economy.
There is also a practical risk. If pension schemes are pushed towards UK assets faster than suitable investment opportunities can absorb the capital, money may flow into assets at inflated prices or into projects that do not offer adequate returns.
That would undermine the central purpose of pension saving.
The difference between encouragement and compulsion
A key issue is whether the proposal would operate as an incentive, a condition, or a form of compulsion.
If pension tax relief were only available where a scheme met certain UK investment requirements, that would be a powerful intervention. It would not be the same as the Government directly instructing each saver what to buy, but it would materially shape investment behaviour.
There may be a middle ground. Tax rules could be designed to encourage UK-focused funds without penalising savers who need global diversification. Additional incentives could be offered for specific qualifying investments. Default funds could include a modest UK growth allocation, while still retaining international exposure.
The detail matters. A carefully designed incentive might support domestic investment without damaging saver outcomes. A blunt rule could create complexity, distort investment decisions and reduce trust.
Why the UK has a capital problem
The debate also highlights a wider weakness in the UK economy. If British companies struggle to attract capital, the question is not only where pension funds invest. It is also why domestic opportunities are not already compelling enough.
Investors need confidence in regulation, taxation, management quality, market liquidity, infrastructure and exit routes. Pension capital may help, but it cannot solve all of these issues by itself.
If UK growth companies are to attract more institutional investment, they need a market environment that supports scale. That includes stronger capital markets, better routes from private to public ownership, more predictable policy, improved planning and infrastructure delivery, and management teams capable of using capital productively.
Without those conditions, directing more pension money into UK assets may treat the symptom rather than the cause.
A business lesson in aligning incentives
The proposal is useful because it shows how powerful incentives can be in shaping economic behaviour.
Businesses use incentives constantly. They encourage customers to buy, employees to perform, investors to commit and suppliers to prioritise. But incentives work best when the interests of all parties are aligned.
In this case, the challenge is alignment between three groups: the saver, the Government and the business sector.
The saver wants a secure and adequate retirement. The Government wants stronger national growth. Businesses want access to long-term capital. A successful policy would need to serve all three.
If the policy helps businesses but weakens pension outcomes, it will fail. If it protects savers but does nothing to improve investment in Britain, it will fail. The opportunity lies in designing a system where UK investment is attractive on its own merits and pension savers benefit from participating in that growth.
The political importance of the proposal
The timing of Haldane’s comments also matters. Pension reform has become one of the main areas where economic policy, tax policy and growth strategy overlap.
The Government has already accepted that the pensions system can play a larger role in supporting productive finance. The remaining debate is how far ministers should go, and whether voluntary commitments are enough.
Financial firms have traditionally resisted mandatory allocation rules, arguing that investment decisions should be made by fiduciaries rather than politicians. That argument carries weight. But the Government may also argue that tax relief worth tens of billions of pounds should not be treated as a neutral subsidy with no wider economic objective.
This tension is unlikely to disappear. As public finances remain tight, policymakers will continue looking for ways to use existing tax reliefs and private capital to support growth.
A reform worth debating, but difficult to design
Haldane’s proposal raises a legitimate question. If the state subsidises pension saving on a large scale, should it ask for more of that capital to support the domestic economy?
There is a strong argument that the UK needs more patient capital, especially for growing companies, infrastructure and innovation. There is also a strong argument that pension savers should not be used as a convenient funding source for political objectives.
The practical answer may be more nuanced than either side suggests. The UK probably does need a stronger domestic investment culture. But it also needs to preserve diversification, fiduciary duty and confidence in the pension system.
The best outcome would be reform that makes UK investment more attractive, not reform that makes savers feel trapped. Tax relief can be a powerful policy tool, but it must be used carefully.
Pension savings are private money supported by public subsidy. That makes them economically important and politically sensitive. The debate now is not whether pensions can help Britain grow. It is how to ensure that, in trying to support national growth, the system still puts savers first.
Photo by micheile henderson on Unsplash
