Introduction

Pensions and pensions policy represent one of the major areas where taxation and social policy interact. Decisions impact on the current and future living standards of most individuals, involve substantial and growing state expenditure, raise questions of equity and efficiency, and grapple with the issue of the long-term sustainability of current approaches given demographic trends.

Pension provision has sat at the heart of the welfare state model of most countries since the emergence of these models in the late 1800s. States intervene to provide income to individuals once they reach an age where they are no longer required to work, via a state pension scheme in conjunction with a benefit system, pursuing a policy objective of preventing poverty in old age. States also adopt policies to encourage individuals (and/or their employers on their behalf) to save from current income during their working lives such that this income is available in retirement, pursuing a policy objective of income smoothing and in the process creating some degree of reduced reliance on state provision alone for the costs of retirement.

This chapter examines the linkages between pensions and the taxation system in the UK and traces their evolution over time. In particular, it focuses on the current suite of tax-based incentives for occupational and personal pension savings and highlights the very significant tax-advantaged position provided for this form of long-term savings over most other forms in which capital value can be accumulated to support living costs in retirement.

The chapter is structured as follows. The next section outlines the current UK pensions system. It is followed by an assessment of the pensions policy landscape, with some contextualising comparative comment on this landscape internationally. The fourth section then provides an overview of how pensions and taxation interconnect to motivate (and constrain) pension savings and to aid income adequacy objectives. The fifth section considers a series of key issues that arise from recent and possible future reforms of the pensions-taxation policy space and explores these in the context of the taxation and social policy choices that look set to arise in the years to come. The final section offers some concluding comments.