The UK spends more than £50billion a year on pension tax relief, prompting calls for reform

Pension tax relief could be in line for a major overhaul under proposals aimed at boosting investment in British businesses.

The changes would encourage more retirement savings to support UK companies and economic growth.

Andy Haldane, the former Bank of England chief economist who is advising Andy Burnham on economic policy, has urged the Government to link pension tax relief to investment in UK businesses.

Speaking at the British Chambers of Commerce annual conference in London, Mr Haldane said the more than £50billion spent each year on pension tax relief offered a "ready made" opportunity to help grow the economy.

Mr Haldane, who is also president of the British Chambers of Commerce and has been advising Mr Burnham as he develops his policy programme, described the proposal as a "largely fiscal-free way" of giving the economy "a genuine giddy-up".

He said the plan would provide a "third way" between leaving markets entirely alone and forcing pension funds to invest in British assets.

Mr Haldane argued that Britain currently spends more on tax relief for pension savings than it does on defence, but receives little economic benefit in return.

"These benefits are conferred without any accompanying commitment to support British businesses, or therefore UK growth," he said. "Most are implicitly supporting US corporations and indeed foreign governments."

Instead, he said linking pension tax relief to investment in UK companies would help boost British businesses while still allowing pension fund managers to decide where to invest.

Mr Haldane also warned that Britain continues to lose many of its most promising companies to overseas buyers, saying the country is effectively giving up future growth and jobs.

He urged ministers to demonstrate "a level of boldness" in tackling the problem, insisting action must come "at speed and scale" to protect the country's entrepreneurial talent.

"If the government wishes to act, at speed and scale, to take advantage of the UK's brilliant seed-corn businesses, before they perish on the vine or are plucked off by overseas foreign raiders, then greater boldness of this type is what will be required," Mr Haldane told the conference.

Mr Haldane noted that pension funds in Europe, Canada, Australia and Japan typically invest between 20 and 40 per cent of their assets in domestic companies, representing multiples of their global market share.

Britain's pension system, despite being large and well-established, stands alone globally in lacking this "home bias", he observed.

The former central banker cited research indicating that more than 70 per cent of British savers would actually prefer their pension money to be invested in UK firms.

Given these preferences, Mr Haldane suggested that the default option for auto-enrolment pensions should be investment in British companies.