Private Pensions Yield £56 Billion in Drag, Public Sector Pensions Untouched

Rachel Reeves’s Budget freezes income tax thresholds until 2031, pulling in £56 billion over the decade through fiscal drag. Private sector salary sacrifice schemes face new 15% employers’ National Insurance on contributions above £2,000, projected to raise £4.7 billion by 2029. Public sector pensions escape all such raids.

This marks a decade-long freeze from 2021, transforming 40% higher-rate tax from a minority burden into a mass reality. Basic-rate earners lose £220 annually to stealth rises. The Treasury gains £7.6 billion in 2029-30 alone.

Pension attacks follow a pattern. From April 2027, private pensions lose inheritance tax exemptions, as previewed in the prior Budget. Labour chancellors repeatedly target built-up private savings, contrasting Conservative expansions like auto-enrolment.

Gordon Brown’s 1997 advance corporation tax withdrawal devastated private defined benefit schemes. Most private employers shifted to defined contribution plans with volatile returns. Public sector schemes retained generous defined benefits, fully guaranteed.

Public pensions now diverge further. Gold-plated arrangements persist for civil servants, NHS staff, and teachers, insulated from market risks. Private workers fund these through taxes, while their own pots shrink under dual income tax and NI.

Investment choices compound the gap. Many public schemes divest from oil, mining, defence, and tobacco—steady dividend payers with strong growth. “Ethical” alternatives underperform, yet taxpayers cover shortfalls via defined benefit guarantees.

No moral hazard applies to public schemes. Shortfalls trigger automatic bailouts from general taxation. Private savers bear full investment losses without recourse.

This two-tier structure distorts labor markets. Public sector jobs offer lifetime security, drawing talent from productive private roles. Auto-enrolment builds modest private nests, now raided amid stagnant wages and rising costs.

Fiscal reliance on private pensions signals deeper weakness. Trillions in assets tempt repeated plucking as growth falters. Savings ratios, once internationally competitive, collapsed post-Brown and never recovered.

The Budget spares the client state entirely. Productive workers and self-employed face compounded burdens to sustain public sector privileges. Incentives to generate wealth erode as penalties mount.

Britain’s pension divide hardens fiscal sclerosis. Private sector output shoulders public consumption, yet receives targeted extraction. This systemic favoritism spans governments, fueling productivity decay and intergenerational inequity.