Pension reforms could impact high-net-worth individuals “significantly”, according to Jack Munday, chartered financial adviser at Saltus.
The government announced a series of reforms such as raising the minimum pension age and consolidating defined benefit schemes in a bid to boost economic growth.
Although he was hopeful these reforms would have a positive impact, Munday said he remained "cautious".
One of the reforms under consideration is the continuation of the Mansion House review, which proposed a shift towards greater market consolidation and increased investment in UK-centric assets.
Munday believed while this would stimulate short-term economic growth, there were some potential risks.
“There is a danger of a 'set and forget' mentality, where large scale asset management lacks the ability to be truly targeted, leading to asset drift (where changes in market prices lead to unintended changes in the balance of a portfolio) and increased risk.
"Moreover, reduced competition in the marketplace could result in price surges, with the most dominant players exerting more control,” he explained.
Munday also highlighted the challenges the government had with trying to using pension reforms to stimulate economic growth.
He said: “Raising the retirement age may keep more people in the workforce, but it is more likely to feel like a forced measure rather than an incentive for older workers.
“A 2022 study by the Institute for Fiscal Studies found that the increase in the state pension age from 65 to 66 years old led to a rise in income poverty among 65 year olds by 13 per cent, despite a decrease in early retirements.”
Munday also questioned the efficacy of flexible pension withdrawal options as a means to stimulate consumer spending.
“While more flexible or tax efficient pension withdrawals could lead to marginal increases in spending, the broader economic impact might be limited.
"Those who need to access their pensions likely do so already, and the wealthier individuals who use pensions for generational wealth transfer are less likely to draw down and spend these assets,” he added.
He also thought the government’s aim to invest into SMEs to boost UK investment carried “significant risk”.
“The Pension Protection Fund or The Pensions Regulator could be left to cover the losses if these investments fail, ultimately passing the cost onto the broader industry and, by extension, clients,” Munday explained.
He proposed alternative approaches to encourage UK based investment without compromising the diversification and autonomy of pension schemes.
These included a flat rate of pension tax relief, which could promote broader investment in UK start-ups while maintaining a balanced approach to risk.
He said: “While the government's proposed pension reforms hold potential to kickstart the UK economy, I would urge caution and careful consideration.
“The success of these reforms in delivering the macroeconomic growth the government hopes for will depend on the execution and the ability to balance short term gains with long term stability.”
