Advisers have accused former pensions minister Steve Webb of scaremongering over claims George Osborne will scrap pensions tax-free lump sums in the Budget.
The Chancellor is currently considering fundamental reform of pension tax relief, including potentially overhauling the system so pensions are taxed in a similar way to Isas.
Webb, who is now director of policy at Royal London, told the Sunday Times the tax-free lump sum will become “extinct” if Osborne pursues this option – and indicated it is favoured by the Treasury.
He added: “Under the current system you can get tax relief on your pension contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax-free — a hugely tax-advantaged way of saving.
“In effect, a quarter of the money in your pension never gets taxed at all under the current rules.
“But with a pensions Isa, this tax break quietly disappears. Since all of the money that goes in to a pensions Isa has already been taxed, there is no equivalent of the tax-free lump sum.”
But advisers have criticised Webb for stoking fear about a potential pensions raid by the Chancellor.
Ovation managing director Chris Budd says: “We have got clients who have been put into a panic by Steve’s comments.
“It’s telling that we have a Government that people don’t trust not to do something dramatic at the drop of a hat. When someone like Steve makes comments like that people believe it could happen, because the Government has messed around so much.
“I wish he had chosen his comments more carefully.”
Austen Birkett managing director Mark Birkett adds: “Obviously nobody knows what is going to happen next but with everything that has gone on over the last couple of years, he could have conveyed his opinion differently.”
Webb says his comments were designed to alert people to the risks associated with the pension Isa model.
He says: “My point is partly that he wouldn’t have to utter the words ‘I’m abolishing the tax free lump sum’ – it would just quietly disappear.”