Scottish Widows has warned allowing people to take their savings tax-free would remove a “braking mechanism” to prevent savers from squandering their pensions.
The company has said the current system - which means savings are tax-free when they go into the pot but taxed when they leave - prevents people from taking their money too early and spending it all.
This would put pressure on taxpayers to sustain them in later retirement, meaning any new system would need to include a braking mechanism, Scottish Widows said.
Pete Glancy, head of industry development at Scottish Widows, said the country faces a considerable challenge in terms of public finances, along with the funding of retirement and long term care for an ageing population.
“The current system has room for improvement and we welcome the government review and the open way in which it is being conducted.”
In his Summer Budget, chancellor George Osborne launched a review of the tax incentivisation of pension saving.
He even said pensions could be taxed “like Isas”, meaning savings would moving from being taxed as they leave the pension pot to being taxed as they go in.
Mr Glancy said that while Isas are simple to understand compared to pensions, the latter should remain a more attractive saving product than the former under any new system.
Darren Cooke, a chartered financial planner with Derbyshire-based Red Circle Financial Planning, agreed about the need to disincentivise people from taking all their money in one go.
“There needs to be some sort of disincentive to stop people withdrawing their entire pot and spending it because if people were able to access it and blow it on a car or a holiday I think they would.
“I think the system we have at the moment encourages people to save and encourages them to use their savings in a sensible manner.”