Summary:
Change the way in which tax relief on pension contributions is made to create a sovereign wealth fund used to invest in UK start-ups, ethical businesses, and to enable the continued British ownership of key industries.
Policy:
According to The Guardian, pension tax relief costs the government almost £40 billion per year.
While the relief is useful to incentivise individuals to contribute to their pension funds, it is a significant loss of revenue for government.
I propose an alteration not to the relief itself, but instead the way in which it is provided.
Instead of the pension tax relief being contributed to individuals’ pension funds, it should instead buy shares in a UK sovereign wealth fund.
Since pension funds are themselves investment funds, it would not make that great a change to pensions, however it could create significant benefits for government, which would have £40 billion per year to invest.
The aim of the sovereign wealth fund would be primarily, though not exclusively, to invest in British businesses; providing start-up capital for high growth businesses, ethical B-Corp and Social Enterprises, and creating a large investment vehicle which could purchase critical British businesses to ensure continued ownership of strategic organisations within the UK.
The fund would need to be manged independently of government to maximise political neutrality, but the Bank of England model shows how this could be done, as does the management of Norwegian’s sovereign wealth fund.
The fund would invest both for growth and for dividend yields, to enable it to continue growing even while some investors reached pension age and therefore sought to cash-in their shares.
To better enable the fund to continue to grow with minimal withdrawals, shares in the fund would attract a lower rate of inheritance tax and would not count towards the tax-free inheritance allowance, encouraging parents and grandparents to retain their shares and pass them onto their offspring. Not only would that help the fund to grow, but it would also enable younger people to attain greater pension security.
Assuming similar annual contribution levels and some annual growth in the value of the fund, within a decade it would be worth around £500 billion, or roughly 25% of GDP.
Such a fund would provide finance for a range of investments, at no cost to the public purse, opening an opportunity to achieve significant social and commercial successes in the country. For example, the fund could create an ethical housing investment, building highly sustainable housing in key demand areas and providing subsidised rent to key workers, all while providing a profitable return on investment.
The fund could also invest in future technologies, and in doing so attract a lot of the research, development and manufacturing for those technologies into the UK.
The need to provide a commercial return on investment to provide for people’s pensions would help to ensure good discipline for the management of the fund, pushing for strong investments that provide benefits in the long term.
Most people seem largely unaware of the amount of tax relief they receive for their pensions, and because it is a contribution to their pension as opposed to a receipt of hard cash, there is less of an psychological attachment to the money. That provides a good opportunity for government to utilise the money more effectively in a UK sovereign wealth fund, rather than simply transferring it to massive pension funds to invest.
However, if there were criticisms of the shift from tax relief to shares in a sovereign wealth fund, the Nudge Unit could be brought on board, designing a system where relief automatically comes in the form of shares in the UK sovereign wealth fund unless an individual chooses instead to opt for cash into their private pension funds.
A nudge framework of auto-enrolment for pensions has been used over the past few years to increase pension savings, so extending it in the way proposed here to create a sovereign wealth fund should be eminently achievable.
Countries such as Norway and Israel demonstrate the value of sovereign wealth funds, this proposal would provide a way for the UK to join the club and invest in both the economic growth of our nation and the pension prosperity of our citizens.
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