Pensions minister Ros Altmann has clashed with the Treasury after it floated plans to tax pensions like Isas, saying such a move would be a “big mistake”.
Last week the Government launched a wide-ranging consultation on reforming the pension tax relief system.
One of the ideas proposed is moving from the current exempt-exempt-taxed model, where pension contributions are exempt from income tax, to an taxed-exempt-exempt system mirroring Isas.
Chancellor George Osborne said: “Pensions could be like Isas – you pay in from taxed income and it is tax-free when you take it out and in between it receives a top-up from the Government.”
But speaking to Money Marketing, Altmann says: “Certainly the current system would be better than just turning pensions into Isas with no lock-in to help people save the money through retirement.
“Letting them take the money out tax-free would be a big mistake.”
The pensions minister also appears to favour a top-up or bonus structure to encourage savers to lock their money away in pensions.
She says: “Tax relief is a regressive, unfair incentive for many people and it’s also very expensive. A top-up would be easier to understand.”
In April a Conservative briefing note revealed the party’s plans to raise the inheritance tax threshold to £1m, paying for it with a new tapered annual allowance.
The note promised the Tories “will not propose any further changes to the system during the next Parliament”.
The Chancellor confirmed the changes to the annual allowance in the summer Budget but also said he was “open to further radical change”.
The consultation, which closes in September, also leaves open the possibility of retaining the current systems and “options in between”.
There is growing industry support for a flat rate of tax relief that would redistribute incentives to the lower paid and save the Government money. Former pensions minister Steve Webb promoted the idea during his term of office.
Relief on income tax and National Insurance contributions totalled nearly £50bn in 2013/14.