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Investment giants have warned Labour against cutting the tax relief offered to well-paid Britons on their pension contributions.
Currently, workers on more than £50,271 can claim tax relief on their pension contributions at a rate of 40 percent, which matches the income tax rate payable.
By contrast, most of the UK workforce pays tax at 20 percent and gets this same lower level of tax relief on the pension contributions they make each year.
Rachel Reeves is under pressure to introduce a new flat rate of tax relief on pension contributions of 30 percent. While this would benefit most workers who pay basic rate tax, it would make investing into a personal pension much less attractive for better paid Britons.
A change to the tax relief offered on pensions would raise anything from £3 billion to £10 billion a year depending on how it is structured, which would go a long way to filling a shortfall in government spending.
However, private pension companies, who run the pensions of millions of workers, warn it could deter better paid employees from putting aside enough money for their retirement.
They have also raised concerns about other potential changes, such as limiting the tax-free lump sum that people can take from their pension nest egg of retirement. This figure is currently set at £268,275 and is often used by retirees to clear outstanding debts such as mortgages.
Mike Ambery, retirement savings director at Standard Life, said: “A flat rate of pension tax relief will increase complexity into the pension system and have a lasting impact on people’s future retirement, so it’s important that decisions are made with a long-term view rather than focus on near-term fiscal challenges.”
Steven Cameron, director of pensions at insurer Aegon, told This is Money: “While it may be tempting to the Chancellor to boost tax revenues by reducing such incentives, doing so could have far-reaching adverse consequences if they discourage people from doing the right thing and saving for their own retirement rather than relying on the state.”
Lynda Whitney, senior partner at Aon, said: “Pensions are a long-term product where trust in the structure is vital.
“Changes for short-term budgetary reasons could erode that trust – particularly if the Treasury makes what feels like retrospective changes to pensions taxation of retirement lump sums or inheritance of pension rules.”
Steve Watson, director of policy & research at NatWest Cushon, said:”Any potential change in the pension equation needs to be part of a long-term view. We’ve seen how tinkering around the edges can lead to an imbalanced system.”
And Jamie Fiveash, boss of Smart UK, said: “The tax changes rumoured have the potential to move us in the wrong direction.”
By contrast, experts at the Fabian Society argue that introducing a flat rate of tax relief on pension contributions would be both fairer and raise billions.
The group’s general secretary, Andrew Harrop, said: “Pension tax relief is very expensive and very unequal. It costs the exchequer over £60bn a year and more than half this money goes to higher- and top-rate taxpayers. With huge pressure on the public finances, the UK cannot afford to maintain such a costly and badly targeted system.
“Rachel Reeves needs to raise revenue while also safeguarding family living standards and sticking to Labour’s manifesto pledges. As part of her tax-raising October budget she should introduce reforms to pension tax relief that save money and redistribute taxpayer support from the wealthy to low and middle earners.”