Concerns over potential changes to the tax treatment of retirement savings have continued to grow ahead of Chancellor Rachel Reeves’s Budget next month, with industry experts raising concerns that reforming pension tax could undermine confidence in long-term saving.

Analysis from the Institute for Fiscal Studies (IFS), published as part of the IFS Green Budget 2025 and funded by the Nuffield Foundation in association with Barclays, suggested the Chancellor could raise “tens of billions of pounds a year more in revenue” without breaking Labour’s manifesto promise not to increase the “big three” taxes.

However, the IFS warned that doing so “would not be straightforward”, suggesting that some tax-raising options would be “especially economically harmful”, while “a Budget focused purely on the politics could prove considerably worse on the economics.”

In particular, the IFS said that while restricting income tax relief for pension contributions would raise large sums, but should be avoided.”

"It would be unfair and distortionary to restrict up-front relief but continue to tax pension income at the taxpayer’s marginal rate," the IFS stated.

"It would also be practically extremely difficult to attribute employer contributions to defined benefit arrangements to specific individuals so that they could be taxed."

Given this, the IFS argued that there are better options for increasing tax on pensions, including levying some national insurance contributions (NICs) on employer pension contributions and/or reforming the 25 per cent tax-free element, which it said was "ripe for reform".

Indeed, the IFS' report suggested that "one attractive option for reform would be to replace the tax-free 25 per cent with a (taxable) cash top-up on pension withdrawals,” which could “provide more even benefits” and raise meaningful amounts of revenue.

Alternatively, it suggested that the cap of £268,275, introduced by former Chancellor Jeremy Hunt in March 2023 alongside the abolition of the lifetime allowance, could be reduced, with an earlier IFS report highlighting a cap of £100,000 as an illustrative option.

However, this backing for changes to the lump sum is far from universal, as industry experts have previously raised concerns over the potential for change in this area, with particular worries raised around the potential impact that rumours of a potential change could have on savers' behaviour.

To help address the growing uncertainty ahead of the Budget, AJ Bell recently launched a parliamentary petition calling on the government to commit to a ‘pension tax lock’, which would guarantee the preservation of key pension tax incentives, including tax-free cash and pension tax relief, for the duration of the current parliament.

However, the government failed to commit to such a pension tax lock in its response to the commission, shared this week (22 October), instead pointing pointed to the role of the revived Pensions Commission, chaired by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce, which will make recommendations to the government on the broader questions of adequacy, fairness, and sustainability.

AJ Bell director of public policy, Tom Selby, said that "side-stepping calls for stability in pension tax rules ahead of the Budget gives the government an easy get-out clause for now, although it means savers are subjected to at least another five weeks of uncertainty".

However, there are concerns that this failure to commit to a tax lock could see pre-Budget speculation, potentially triggering a further surge in pension withdrawals.

Selby stated: “The government’s response suggests it could look to the Pensions Commission for an opinion on the future of pension taxation, meaning immediate reform at this Budget should be off the table.

"If this is the intention, as an absolute bare minimum, Chancellor Rachel Reeves should pledge not to make any changes to the pension tax system at least until the commission reports, removing uncertainty in the immediate term, allowing time for the entire pension landscape to be considered in the round and for the implications of any changes to be carefully thought through."

And despite the potential support for changes to tax-free cash, the IFS also stressed that
any attempt to raise revenue from pension tax reform must be part of a coherent strategy rather than short-term fixes.

IFS senior research economist and author of the chapter, Isaac Delestre, said: “Revenue-raising seems likely to be a major goal of the coming Budget.

"But if Rachel Reeves limits her ambition to collecting more revenue, she will have fallen short. Almost any package of tax rises is likely to weigh on growth, but by tackling some of the inefficiency and unfairness in our existing tax system, the Chancellor could limit the economic damage. The last thing we need in November is directionless tinkering and half-baked fixes.”

Adding to this, IFS director, Helen Miller, said: “What will make this Budget important is the choice not only over how much tax to raise, but over how to raise it. There is an opportunity to be bold and take steps towards a system that does less to impede growth and works better for us all.”

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