A leading think-tank has warned that the pension tax system is incomprehensible for savers and costs the state £47 billion every year.
Pension tax relief means that most savers pay nothing to HM Revenue and Customs on their pension fund, instead they can pay income tax when they draw their pension after they have retired. However, the latest research by the Centre for Policy Studies says that this costs the Exchequer £47 billion per year.
CPS research fellow Michael Johnson said: "Roughly half of the adult population do not understand pensions tax relief. Consequently, it is unlikely to motivate them to save."
The research comes as speculation rises about whether the Chancellor of the Exchequer is planning to cut the tax relief that encourages savers to build up a nest egg in a bid to raise an extra £20 billion for the National Health Service.
Two former pension ministers however have warned against such a move.
Sir Steve Webb said:
"Pension tax relief shouldn't just be used as a pot of cash when money is short. If we're going to change pensions and tax, let's think about it, let's plan and let's give people certainty."
"Let's not just have broke chancellors dipping into the pot when they're short of a bob or two. Pension taxes ought to be very predictable because they're of long-term importance … this constant tinkering is no way to run a tax system."
Baroness Ros Altmann agreed, saying that the Chancellor could also see a backlash from voters:
"There's a huge amount of resentment against changes of this kind, particularly among Conservative voters, because there would be quite a lot of losers."