The Chancellor may have to water down his flagship pension reforms as experts warn of an impending multi-billion pound black hole in the public finances as a result of the changes.
It’s been stated that officials have been warned that the Government could lose out on as much as £24 billion because of the pensions freedoms announced by Osborne in his 2014 Budget.
Internal sources said that the concern is that citizens will now pay large amounts of money into their pensions as they approach retirement and receive generous tax relief top-ups. However, they will then find ways of withdrawing their pension savings without paying tax.
In the Budget, the Chancellor announced that retired workers will no longer be forced to buy an annuity – which previously ensured they paid tax on their pension earnings.
Although the reform was eagerly anticipated, the move may unexpectedly lead to a drop in the tax take from pension savings.
Sources stated that options being considered within the Treasury include reining in the tax-free lump sum so that investors are only allowed to withdraw 25 per cent of the growth in their pension pots.
Currently, people can withdraw 25 per cent of the entire value of their savings.
This would mean that someone who saved £100,000, which doubled in value to £200,000, would only be allowed to withdraw £25,000 tax-free. Currently they can withdraw £50,000.
Other options said to have been discussed by Treasury officials include levying National Insurance on pensions contributions or telling investors that they can no longer continue paying into their pension if they have made just one cash withdrawal.
Will Aitken, a pensions consultant at Towers Watson, said: “Either you have to change the tax relief currently available on pensions or you have to give up some of the new flexibilities proposed in the Budget.”
A Treasury spokesman said: “We are not going to get rid of the 25 per cent tax free lump sum. It is a key part of the pensions system.”
However, experts believe the unwelcome move may essentially have to be taken if a large black hole emerges in the public money.