The government has allegedly dropped its plans for the introduction of a flat rate of pension tax relief due to concerns about the impact it would have on public sector workers, reports have suggested.

The Chancellor, Rachel Reeves, was rumoured to be eyeing up the reform that would have reduced the 40 per cent level of tax relief on higher earners' pension contributions in the upcoming Budget.

However, The Times has reported that senior Treasury officials told Reeves that the change would see those with relatively modest incomes working for the state being hit disproportionately.

Therefore, the government is rumoured to have dropped these plans, although it remains unclear as to what the government’s plans are to raise funds to plug the ‘£20bn black hole’ in public finances.

Hargreaves Lansdown head of retirement analysis, Helen Morrissey, said the news that Reeves had potentially abandoned plans to introduce a flat rate of pension tax relief would “no doubt be greeted with a sigh of relief by public and private sector workers alike”.

“This has not been officially confirmed, but the introduction of a flat rate of relief would have been highly complex, expensive and brought further confusion to an already tangled system,” she stated.

However, Morrissey pointed out that other options remained a possibility, most notably the amount of tax-free cash people can take from their pension.

“The lump sum allowance was set at £268,275 by the last government when they removed the lifetime allowance,” she continued.

“This meant that if people built up pensions over and above that previous allowance they would not have access to the generous 25 per cent tax free lump sum on monies over the allowance.

“Any move to restrict it further will be unpopular with those planning their retirement with higher levels of saving. The constant moving of the boundaries, so soon after the lifetime allowance was removed, makes planning impossible.”

Morrissey called for clarity for those with pensions below this limit, warning that taking money out of a pension now potentially deprives it of future investment growth and leaving it subject to tax.

“There’s also the possibility it could be placed in a low interest bank account where its purchasing power gets eaten away by inflation over time,” she said.

“This ongoing speculation about changes to tax-free cash is damaging. The Chancellor has recognised that businesses need certainty in the taxation environment to make investment decisions.

“The same is true of our personal finances. The government have left people to make impossible decisions about their investments and pensions. The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again.”

Also commenting on the rumours that Reeves has dropped plans for a flat rate of pension tax relief, Standard Life retirement savings director, Mike Ambery, said: “Changes to income tax relief are a potentially significant revenue raiser but come with two major challenges.

"Firstly, they would by highly complex to implement and secondly, they come with political downsides given their knock-on implications for public sector workers in particular.

“The Chancellor will be assessing many ways of raising revenues and whether pensions will feature prominently in the Budget remains to be seen but there are other aspects of the system that would pose fewer logistical issues and come with fewer strings attached.

“Pensions are long term by their nature and ideally any changes would be considered as part of the government’s upcoming pension and adequacy review, so that the different aspects of pensions system could be viewed in the round but clearly there is some pressure on the nation’s finances in the short term which may make this a challenge.”

This article originally appeared in our sister publication Wealth Investment News.

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