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A commentary for those approaching retirement
Pension tax relief has been one of the most dependable tools in retirement planning for decades. You contribute to your pension, the government tops it up (at your marginal rate of Income Tax) and the money grows largely free of tax until you draw it down. For higher and additional rate taxpayers, this has always been an exceptionally efficient way to build wealth.
For example, if you earn £150,000 per annum and wish to make a £60,000 gross pension contribution in the current tax year, it will only cost you £29,729:
You will also benefit from regaining your personal allowance, which is gradually lost on income over £100,000.
That efficiency is now firmly in the sights of the Treasury. The Second Pensions Commission, appointed by the government to chart the future of UK retirement policy, published its interim report in May 2026. It presents a candid assessment of why the current system is increasingly difficult for any government to defend and, by implication, why reform is a question of when, not if.
The scale of tax relief — and why it matters
The UK’s pension system operates on what is known as an Exempt–Exempt–Taxed basis. Contributions go in free of Income Tax; growth within the fund is largely tax-free; and income drawn in retirement is taxed as earned income with the important exception of the 25% tax-free lump sum, currently capped at £268,275.
On top of this, employer contributions are exempt from National Insurance, salary sacrifice arrangements offer further savings and investment returns compound inside the wrapper without attracting Capital Gains Tax or Income Tax along the way. The combined generosity of these provisions has made pensions the most tax-advantaged vehicle available to UK savers.
For a government already facing significant fiscal constraints, a tax relief bill of this magnitude and one that is growing, is an obvious pressure point.
Who benefits the most from tax relief?
“Higher-rate taxpayers represent 15% of taxpayers yet receive around 55% of Income Tax relief on pension contributions.”
The relief was intended to encourage saving for retirement. Critics argue that those earning above the higher-rate threshold, who are far more likely to save regardless, do not require such a generous incentive from the state. That argument, which has been made by the IFS and others for years, now has the Commission’s data squarely behind it.
What reform could look like
The Commission does not recommend specific changes to pension tax relief in this interim report. Its final recommendations are expected later. But the direction of travel is clear and previous Budget decisions have already moved in this direction.
The 2025 Budget, for instance, capped the amount that can be sacrificed through salary sacrifice arrangements without attracting National Insurance contributions at £2,000 per employee from April 2029. This is a meaningful reduction in the value of salary sacrifice for higher earners, potentially just a first step in trimming the overall relief bill.
What this means if you are approaching retirement
If you are a higher or additional rate taxpayer within ten years of retirement, you sit in the group that benefits most from the current regime and therefore has the most to lose if it changes.
The relevant question is not whether reform will happen, but whether your planning accounts for the possibility that it might and whether you are making the most of the current rules while they remain in place.
That is not a call to take unnecessary risks or make decisions that would otherwise be wrong for your circumstances. It is, rather, a prompt to ensure that your pension planning is genuinely optimised under the existing rules because the window in which those rules apply at their current generosity may be narrower than you expect.
This is issued by IPS Capital LLP of 4 Eastcheap, London EC3M 1AE; a limited Liability Partnership registered in England OC328405 and authorised and regulated by the Financial Conduct Authority. It is issued in the UK only. This publication does not constitute advice and is for information purposes only. You should not make any investment decision based on this information alone. The information contained herein is correct to the best of our knowledge and we may not be held liable for any errors or omissions. This information is based on current information in respect of UK Pensions. IPS Capital LLP does not offer tax advice and you should seek professional tax advice for your own circumstances. The value of investments can fall as well as rise and you may not receive back the full amount of your original capital.
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