The autumn Budget is expected to bring a cut to the annual allowance, reducing the tax relief available to savers, according to predictions from Royal London.
In a 19 page-long paper entitled Pension Tax Relief: Where will the Chancellor’s Budget axe fall?, the mutual insurer lists potential changes to tax relief and assigns a likelihood to each.
According to Royal London, the most likely change would be a reduction of the annual allowance - a limit on the amount that can be contributed to pensions each year, while still receiving tax relief - from the current £40,000 to £35,000 or £30,000.
This would mean that more than 100,000 higher earners would lose tax relief of up to £4,000 each, the insurer said.
It follows Chancellor of the Exchequer Philip Hammond's speech at the IMF annual meeting in Bali on Friday (12 October), where he hinted once more at changes to pensions tax relief, saying he considered the giveaways "eye-wateringly expensive".
A reduction to the tapered annual allowance, from £150,000 to £125,000, also had a high probability.
This would be applied to high earners, and means that for every £2 of income above £150,000 per annum, £1 of annual allowance could be lost.
Annual Allowance: across-the-board cut to £35k or £30k
Annual Allowance: threshold at which high earners start to face reduced allowance cut from £150k to £125k
Annual Allowance: special ‘Money Purchase Annual Allowance’ cut further from £4k
Lifetime Allowance: freeze or cut from £1.03m
Tax free lump sums – new cap introduced
Detailed changes – eg reduction in ability to ‘carry forward’ unused allowances from previous years
Radical reform – eg ‘flat rate’ tax relief for all savers
Sir Steve Webb, director of policy at Royal London and former pensions minister, said time and again, pension tax relief had been the go-to source of money for cash-strapped chancellors.
He said: "Pensions should be a long-term business where people can plan with confidence for their retirement, knowing that the tax rules around pension saving will be stable.
"But the chancellor will find it hard to raise other, more visible, forms of taxation and is likely to revert to the ‘salami-slicing’ of pension tax relief.
"We fear that the amount people can contribute into their pensions each year will be cut yet again, sending out entirely the wrong message at a time when we need people to be saving more, not less."
FTAdviser reported on Friday that the government has ruled out a single rate of pension tax relief, due to the lack of consensus that a more radical reform is needed.
As the government plans to provide an extra £20.5bn funding for the NHS by 2023 to 2024, pension tax relief has been viewed as one of the likely targets of cuts in the next Budget.
However, according to Royal London, the government is also facing other big spending pressures, such as the need to improve public sector pay, to deal with concerns over universal credit and to meet rising social care costs.
The insurer also noted that political commitments mean that raising other taxes such as income tax, VAT, petrol duties or corporation tax rates would be very difficult.
Finally, pension tax relief costs the government about £25bn per year - net of the tax paid by today’s pensioners -, which has risen sharply in recent years, it added.