In its Green Budget, which looks at the issues and challenges facing Osborne as he prepares for the March 16th Budget, the IFS said there is a "significant chance" that the government’s current fiscal plans will not deliver a targeted surplus by 2020 without further tax rises or spending cuts.
However it argued that the creation of a flat rate of pension tax relief – like the option of reducing the annual and lifetime limits – has the "potential to increase tax revenues somewhat in the short term but potentially at the cost of slightly lower revenues in the longer term".
Yet the IFS had further concerns over the introduction of 'TEE tax treatment', or an ISA-style pension, stating that this "has much more dramatic consequences for the profile of tax revenues and poses significant political risks".
It explained:
"Moving to a system in which contributions are taxed up front rather than on receipt would dramatically boost tax revenues in the near term. But levying this income tax up front would come at the expense of a reduction in revenues in the future, as the government will no longer collect income tax on these pensions in payment.
The Green Budget said that a tendency to focus on 'short-term indicators' could tempt the Chancellor, or one of his successors, to "inappropriately spend rather than bank this temporary windfall".
The IFS added:
"To the extent that the policy change only brings revenue forwards in time, the right response is to bank this money rather than use it to cut taxes or boost spending in the short term.
"But is it credible that the Chancellor or one of his successors – faced with a large surge in income tax revenues – would resist the temptation to give at least some of it away? In the longer term, when higher-income older people are enjoying their tax-free pension income, is it credible that a future, potentially cash-strapped, Chancellor will avoid the temptation to levy tax again on this income (i.e. TET tax treatment)?
"The first question suggests that future generations of taxpayers may not thank us if we allowed a Chancellor to take the tax revenue up front and spend it. The second question suggests that we might ourselves be wary of putting much into our pension funds in case a future Chancellor decides to tax us again."
TISA, the financial services membership association, has previously warned that a move towards a pension ISA would be "counter-productive... would destabilise workplace pension saving without offering a superior outcome for savers and would also result in limited future tax revenues".
Discussing why a TEE approach would not provide a more beneficial and sustainable approach to incentivising savings, TISA argued that there is no evidence to suggest that TEE would lead to increased pension savings, and that it "relies on an expectation of consistency of pension policy over a period of decades when this has been conspicuously absent in recent times".
It added that the removal of taxed withdrawals in retirement reduces the brake on people spending their pension funds too quickly, something that Australia has already experienced.
Royal London's Chief Executive Phil Loney has also said that the firm "strongly opposes" Osborne's proposed changes to the pension tax relief system.
In Royal London's business results, Loney said that the public could not trust future governments to honour any promise of a tax free ISA style income, and that ISA-style pensions would undermine public confidence.
