Budget – pensions and ISA tax incentivised investments can help Chancellor cut taxes while boosting growth and reviving UK stock markets
- Pension funds and ISAs can help the Chancellor out of his fiscal hole by investing more in Britain to revive British long-term growth, infrastructure and housing supply.
- Pensions and ISAs have abandoned UK equity markets – restoring domestic investor support should be a Budget priority.
- 25% of new pension contributions to be invested in UK assets and Mansion House reforms expanded to cover listed and unlisted UK companies.
- A £10,000 Great British ISA.
- Investors can still put their money overseas if they wish, but should not expect taxpayer subsidies for boosting overseas economies, rather than our own.
This week’s Budget should signal a renewal of private investment in British growth, to help the Chancellor out of his fiscal hole, permit tax cuts and also increase tax revenues over time, by increasing investment and growth. It is time to be bold and for the Government to harness the power of domestic investors, to boost Britain and revive our flagging financial markets. Measures to require pensions and ISAs to support Britain, using their tax breaks to benefit our own economy, could be a game-changer. At the moment, taxpayers are spending huge sums subsidising people’s investments, but not a penny has to be put into the UK. The Chancellor should seize this last opportunity before the next election, signalling a shift in national funding priorities for tax-incentivised investments.
Budget could signal radical reforms to require pension funds to support UK growth with 25% of new contributions invested in domestic assets: I believe the Chancellor should signal an intention to require 25% of new pension contributions to back Britain. At least 25% of each pension fund originates from tax and National Insurance reliefs (which now cost taxpayers £70billion a year) and 25% of each pension is withdrawn tax-free. In exchange for these generous tax subsidies, there is clearly justification for the Government to require more pension assets to support UK markets, infrastructure and economic growth. This could improve long-term prosperity for pensioners too. If they want to put more than 75% into overseas assets, pension investors can do so, but should not expect a taxpayer subsidy for that.
UK pension funds are heavily underweight in UK shares, unlike other countries: The underweighting of UK equities by our own pension funds seems to be a vote of ‘no confidence’ in our corporate sector, which damages confidence in UK markets as a whole. Other countries ensure their pensions and tax-favoured investment funds are heavily overweight in their own domestic markets. Isn’t it time for the UK to do the same? The following tables show clearly how the UK is an outlier in international comparisons.
Other countries’ pension funds heavily overweight their own assets:
| Country | Domestic Equity | MSCI weight | Relative |
| Australia | 37.7 | 1.3 | 2800% |
| Italy | 41.0 | 0.6 | 6733% |
| Japan | 49.4 | 4.4 | 1023% |
| France | 26.0 | 2.7 | 863% |
| USA | 63.5 | 43.2 | +47% |
| UK | 2.8 | 4.5 | -38% |
– source: Capital Markets Industry Taskforce, data as at Dec 2023
Examples of large global pension fund investment allocations – only UK funds underweight own equity market
| Country and pension scheme | Allocation to domestic equity | MSCI – % weight in index | Relative weight |
| Canada – Public Service Pension Plan | 8.9 | 3.2 | +178% |
| Canada OMERS1 | 13.7 | 3.2 | +326% |
| Canada – HOOPP | 10.8 | 3.2 | 237% |
| Japan – Government Pension Investment | 49.8 | 4.4 | +1026% |
| Japan – Local Government Officials | 49.1 | 4.4 | +1010% |
| Japan – National Federation of Mutual Aid | 49.2 | 4.4 | +1012% |
| France – ERAFP | 35.0 | 2.7 | +1226% |
| France – FRR | 17.0 | 2.7 | + 552% |
| Australia – Australian Super | 45.2 | 1.3 | +3303% |
| Australia – Future Fund | 28.9 | 1.3 | +2074% |
| Australia – Aware Super | 39.0 | 1.3 | +2836% |
| South Korea – National Pensions | 34.2 | 1.3 | +2600% |
| South Korea – Teachers Pensions | 44.1 | 1.3 | +3380% |
| US – California State Pension (Calpers) | 60.1 | 43.2 | +439% |
| US – New York State Common | 68.9 | 43.2 | +59% |
| US – New York City Retirement | 61.4 | 43.2 | +42% |
| UK – Universities Scheme USS | 2.2 | 4.5 | -51% |
| UK – Railways Pensions (Railpen) | 3.3 | 4.5 | -25% |
| UK – HSBC | 2.5 | 4.5 | -43% |
| UK – Parliamentary Pension Fund (PCPF) | 1.7 | 4.5 | -62% |
Mansion House reforms should be expanded to include listed small companies as well as unlisted and should focus on UK businesses: The Chancellor’s Mansion House reforms, which call for pension funds to voluntarily commit 5% of their assets to unlisted companies by 2030, should be bolder in seeking to use pension assets to boost growth. None of the money even needs to be invested in the UK. Surely the Chancellor could be more ambitious and expand these reforms so that pension funds are encouraged to invest more in both listed small growth businesses and unlisted start-up firms –based in the UK – to really boost our promising smaller companies and prevent the best being snapped up on the cheap by overseas rivals.
Great British ISA – £10,000 for 2024: There have been strong calls for the Chancellor to announce a new ISA for 2024. Let’s hope he will listen. A £10,000 tax free allowance that must be invested in UK assets, could provide a boost for British businesses, which are languishing on low market ratings, relative to the rest of the world. This would direct investment tax breaks to support Britain, rather than bolstering overseas companies and markets. The fore-runner of ISAs was the Personal Equity Plan (PEP) which had to be invested in Britain and it is time to revive that idea. It could be a win-win-win situation, benefitting UK stock markets, improving investor returns and boosting the British economy with new investment.
Investors can still invest in overseas markets, but taxpayer subsidies need to once again contribute to keeping the UK a world-leading financial sector: UK institutional and private investors used to be a strong, reliable source of domestic support for UK companies, which helped create a thriving, world-leading UK financial sector. However, in recent years, especially since 2008, pension funds have abandoned UK equities and other growth-boosting investments, buying more fixed income and overseas or alternative assets, leading to underperformance of UK markets. Many ISAs are invested only in cash, which is not a sensible long-term investment strategy. Bringing back stronger domestic demand can start a virtuous circle of recovery for British business and this week’s Budget provides a real opportunity for a new path.
3 thoughts on “Budget – pensions and ISA tax incentivised investments can help Chancellor cut taxes while boosting growth and reviving UK stock markets”
Is the reason for such low Uk investment not down to the fact that in the main UK shares greatly underperform Vs US for example. Would it not be the case that the individual investor would be penalised as a result??
The share market is like any other market and driven by demand and supply. Right now there’s a lack of demand and that is driving down prices (returns), which leads to lower demand and so on – it’s a downward spiral. The Chancellor needs to find a way to increase demand for UK shares – tax incentives on company profits could be one way of doing that. The reason Australian super funds are so heavily invested in Australian shares is due to dividend imputation, ie investors get a credit for tax already paid by companies on profits paid out as dividends.
Gordon Brown’s removal of ACT relief effectively bankrupted the private sector’s DB pension universe. Employers could not afford to make up the differences in funding rate required to offset the effects of the raid. UK pension funds effectively decided that it was no longer a good idea, financially, to invest in UK shares. Unless ACT relief is re-introduced, there seems to be no reason why anything will, or should, change. At the time, Brown’s stealth tax raised about £5 Bn. It’s now estimated to have cost pension schemes about £250 Bn.