Reduced pension cap required: Tisa

John Lawson, head of pension policy for Standard Life, who also sits on the retirement council of the Tax Incentivised Savings Association, said currently there was tax relief on pension contributions of up to £245,000 a year.

He said Tisa's sums showed if pension tax relief was restricted to £50,000 this would generate a similar amount of cash for the government as its Budget pension changes that are coming into force in 2011, but would not put people off saving for retirement.

The government announced in the Budget earlier this year that it would restrict income tax relief on pensions contributions for people with taxable incomes of more than £150,000 until it is tapered down 20 per cent.

It argued in 2008 to 2009, individuals with gross income of more than £150,000 represented just 1.5 per cent of pension savers yet received a quarter of tax relief on pension contributions (£6.1bn).

Industry commentators, such as Martin Palmer, head of corporate pensions marketing for Friends Provident, were swift to point out any attack on pension tax relief sent the wrong message but the government has stuck by its decision to complicate the pension tax system just three years after A-Day and 'pensions simplification'.

Daniel York-Smith, spokesman for the Treasury, said the government's belief that pensions contributions for people with taxable incomes of more than £150,000 should be tapered down remained unchanged.

He said: "The government believes the restriction of pensions tax relief for the top 1.5 per cent of pension savers, who receive 25 per cent of the value of pensions tax relief, is a fair measure to contribute to halving the deficit within five years.

"A significantly lower annual allowance could affect those on significant lower incomes and would not effectively address the disproportionate benefit to those on the highest incomes from pensions tax relief."

Mr Lawson said pensions were about tax deferral and the government had broken that tacit rule by bringing in a system from April 2011, where people would get 40 per cent tax relief on the way into a pension but being charged 50 per cent when they get income.

Mr Lawson said: "Bringing down the allowance from £245,000 to £50,000 will achieve the same as what it is planning to do for high earners now. It will hit high earners and the government wants to hit them in the pocket."

Tony Vine-Lott, director-general of Tisa, said: "Lowering the annual allowance is one of the proposals our retirement council is talking to the Treasury about.

"I agree with a universal cap of £50,000 as it is easier to understand and it makes more sense. The government is trying to reduce the allowance but people will just go to lawyers and accountants to avoid tax and try and turn income into capital."