A radical shake-up of pensions that would abolish tax relief on contributions but allow savers to take their retirement pots tax free is being considered by George Osborne.
The plan, which has been dubbed the pension ISA, remains a frontrunner after Iain Duncan Smith told the chancellor that he would not oppose the reform if it was presented in the budget later this month.
Whitehall and the pensions industry have lined up in opposition to the pensions ISA. Pension firms had pinned their hopes on Mr Duncan Smith to kill off the planned ISA, which they claim would wreck the “auto enrolment”, which is a new requirement for most firms to offer workplace pensions.
Even Mr Duncan Smith’s department of work and pensions, which has managed the eight-year, £15 billion auto enrolment programme, is said to share fears that the additional new ISA system would land employers with billions in extra costs.
However, Mr Duncan Smith has told Mr Osborne that he won’t oppose the measure, The Times has learnt.
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The welfare secretary discussed options for reforming pensions with the chancellor on Tuesday with the budget scheduled for March 16.
As insiders predict that the decision will “go down to the wire” the pensions industry is engaged in a desperate last-ditch operation to persuade Mr Osborne to ditch the ISA idea.
Huw Evans, the director general of the Association of British Insurers, also claims that it would reduce incentives to save while delivering no benefit for most pensioners. Only those with the richest pots would benefit from scrapping tax on all pension payouts since most receive too little from their savings to be liable, he said.
Baroness Altmann, the pensions minister, has also previously described the pensions ISA as “dangerous” for retirees encouraging them to spend cash they should keep for later life.
The expert, ennobled and brought into government by David Cameron after the election, also suggested that pension ISAs could be taxed by future governments.
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She is said to have had a series of “feisty” encounters with Mr Osborne over pension reform in recent week. Her boss has told Mr Osborne that he will not oppose any shake-up.
“He regards it as the chancellor’s prerogative,” said one friend of the welfare secretary who has made the Brexit campaign the main focus of what is widely expected to be his last months in government.
Separately, Mr Duncan Smith refused to say that there would be an upper limit on the state pension age after he was called to the Commons to answer questions on a new review announced on Tuesday.
He dismissed as “ludicrous” Labour claims that workers under the age of 55 could face having the state pension age lifted to 75. However, he said that SNP worries that the current system that links qualification to state payments to average UK life expectancy did not reflect the fact people in Scotland, on average, live two years less were “legitimate”.
Ken Clarke, a former chancellor who urged Mr Osborne to stick to his guns on pension reforms in The Times earlier this week, said it was inevitable that changes to state pension age would generate “loud complaints”.
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“But a government has a duty to proceed in the interests of the country and in the interests of future generations of working taxpayers who will not be able to afford to sustain our system unless we respond to reality,” Mr Clarke said.