There has been plenty of talk about pensions in the run-up to the Budget. It is widely predicted that the government is planning some sort of raid on pensions in order to make its sums add up. There are a number of ways in which George Osborne could do this: some would be devastating, and others less so.
So what could happen, what will the consequences be, and what should the government be doing with pensions?
Raid on reliefIn the last few days all the talk has been about a raid on tax relief. There's no doubt that pensions tax relief is generous - because you get relief at your marginal rate. This means that higher-rate tax-payers receive relief at 40%. There has been a great deal of speculation that this could be set for the chop.
However, Tom McPhail, head of pensions research at advisers Hargreaves Lansdown says this is highly unlikely: "Any move to restrict tax relief would be a tyre-screeching u-turn, given that this government only restored full tax relief a year ago."
"Any disconnect between the rate of tax an individual pays on their income and the rate of relief they receive on their pension contributions would result in an obscenely bureaucratic system to police it. No one who advocates a restriction to higher rate relief has yet come up with a credible way of achieving this goal whilst also keeping complexity down to an acceptable level. So unless the Treasury is really, really desperate for money, we don't think this will happen."
Tax-free cashAnother potential target is the tax-free cash that pensioners are allowed to take out of their pension on retirement. At the moment this is usually 25% of the pension pot, and there have been questions as to whether the government will cut this.
However, again McPhail thinks this is erroneous. He explains: "There will almost certainly not be any restriction to the tax free lump sum payable at retirement. If this were made retrospective, applying to existing accumulated pension funds, then it would be widely seen as a betrayal of investors' trust and would have an immediate and significant negative impact on investors' confidence in pensions. If it were to apply only to future accruals then it would not only create further bureaucracy, it would also fail to deliver any significant new revenue to the Treasury for many years to come. "
Annual allowanceInstead, he thinks Osborne will focus on cutting the annual allowance. He has already shown a good deal of enthusiasm for this approach - and in April 2011 slashed it from £255,000 to £50,000. This has the advantage that it would be seen to take action against higher earners, and it would be simple to implement. However, McPhail warns: "It would generate no more than a few hundred million pounds at most."
Do nothingMcPhail warns that although this is the most likely option, it could further damage confidence in the system. He says: "The government should leave pensions alone. Better still, it should give a commitment that it will leave pensions alone for at least the remainder of this parliament and it should call on the opposition to form a consensus that pension taxation is off the agenda for the next 10 years. The government should resist the temptation to treat pensions like an ATM, what we need is a period of stability."
NFU Mutual's pensions specialist, Steve Meredith, agrees: "We think Mr Osborne should steer clear of pensions. All people saving for retirement need reassurance that the Government isn't going to move the goalposts halfway through their working life. Rather than adjusting tax reliefs, Mr Osborne should focus on encouraging more working adults to make a much-needed long-term financial commitment to their retirement."
In fact, Meredith wants to see pensions become more generous rather than less, saying: "If the Chancellor really wants to provide more flexibility in retirement savings he could allow for premature access to pension funds for one-off purchases such as a first time buyer's mortgage deposit. This may not only encourage people to start saving for retirement from a younger age, it could also give a sluggish housing market a boost."