The industry has heavily criticised proposals made by a think tank to scrap pensions tax-free cash and fund the abolition of inheritance tax instead.
Mark Littlewood, director-general of the Institute of Economic Affairs, called on the government to make the tax change in an article in The Times, where he argued “there is very little to justify the tax-free lump sum people can withdraw from their pension pot”.
But providers and advisers have warned of “potentially disastrous long-term consequences” from any such measure, which they said was a far cry from “progressive change”.
Under the pension freedoms reforms most pension savers over the age of 55 are entitled to take some or all of their pension savings in the form of a cash lump sum, with the first 25 per cent being tax-free.
Mr Littlewood noted that putting an end to that could, for example, go alongside reducing or eliminating inheritance tax.
He added: “In very broad terms, the burdens and benefits are both felt by the same demographic. Simplifying the tax system should involve taking rather less with one hand, while giving out less with the other.”
The Institute of Economic Affairs is a right wing think tank that has previously called for IHT to be scrapped under a “radically reformed tax system”.
It emerged last week that chancellor Sajid Javid is considering to either scrap or make reforms to the unpopular inheritance tax regime later this year.
Tom Selby, senior analyst at AJ Bell, warned: “Being able to access a quarter of your pension pot tax-free from age 55 is one of the best understood benefits of saving in a pension, so ditching it altogether would have potentially disastrous long-term consequences”.
Steve Webb, director of policy at Royal London, said: “Whereas few people understand the benefits of marginal rate tax relief on pension contributions, pretty much everyone is aware of the tax-free lump sum. Abolishing this would massively damage the public appetite for saving in a pension.”
He added: “It is also the case that tax-free cash is of some benefit to a wide range of people, not just the richest. Abolishing tax-free cash to pay for abolishing IHT would transfer wealth from a wide spread of pension savers across the income range to the inheritors of the largest estates, which doesn’t seem like a progressive change.”