The new limit of a £40,000 annual allowance for higher-rate tax relief on pensions may be under pressure

Abolishing higher-rate relief has been on the LibDem manifesto for some time. The TUC has argued it costs the Treasury more than public sector final-salary pensions.

The Centre for Policy Studies’ report suggests that as well as limiting tax relief for pension contributions with the annual cap, that tax relief could either be changed to a flat rate, rather than being given at the marginal rate or that, over the longer term, pension savings should be aligned with the Isa regime, with no tax relief up front but growth and income from retirement savings could become exempt.

If George Osborne likes the sound of the report, it will mean massive changes to the way that advice on pensions is given

A flat rate of 20 per cent tax relief across the board would save the Treasury about £7bn a year, every year, a massive contribution to reduction of the deficit, which is the Government’s number one priority.

What would the consequences be?

The majority of those in company schemes would continue to save because of the employer contribution and the very wealthy, who get most of the higher-rate tax relief, would save elsewhere.

They will never be poor in retirement anyway, so, from a Government point of view, what is to be lost?

Cutting the Conservatives’ electoral base’s tax relief in half would not go down well in the shires, or in the press.

Suggestions are that the chances of higher-rate relief surviving another two years at less than 50 per cent.

If it is not higher-rate tax relief that goes, then the Treasury will surely look again at tax-free cash. Abolition would save around £2.5bn a year – halving it to 12.5 per cent would generate half that figure. These are significant sums when compared with the cuts that government departments are being asked to make over the next few months.

Some have pointed out that such an overhaul, just four years after A-Day, would be nearly impossible because of the complexity involved. That has never stopped them in the past.

If we do head into a double dip, the chances of Osborne having to call on the extraordinary measure of getting rid of higher-rate relief will rise. Even if he does not get rid, there is nothing to stop him from chipping away at the £40,000 limit.

Action to take

If you are a higher rate tax payer perhaps you should review the amounts you are putting into your pension now, However with the stock markets in a very volatile state good investment advice is essential.