The Inland Revenue is fighting a rearguard battle against Government attempts to alter pension rules to help fund long- term care for the elderly.
The Revenue is opposed to proposals that would allow people coming up to retirement to take a smaller pension in return for a bigger payout should they need care in a residential home.
The plans follow mounting pressure from ministers, worried about the effect on traditional voters of the present policy of forcing the elderly to sell their family homes to pay for care.
Treasury chiefs, who back the proposals, see them as the cheapest way - in terms of lost tax revenue - of meeting the cost of residential care.
They are also among a range of options put forward by the insurance industry as part of its pre-Budget proposals to the Government.
The Inland Revenue is responsible for maintaining tight controls to ensure personal and occupational pension funds are used only to fund retirement.
Some senior Revenue officials are said to be against the proposed relaxation of the rules, arguing that they would leave those in retirement worse off. Unless they needed care, the elderly would not benefit from the income sacrifice they have made.
One source said yesterday the Revenue was not "fantastically in favour" of the proposals. "It is hard to see [the Revenue] winning this one, though. It did agree to a relaxation of pension regulations last year.
"It is now possible to defer buying a pension annuity until the age of 75, living off the lump sum instead. You cannot agree a change like that and then say a person cannot be more flexible in other areas.
"This question of people selling their homes is a far hotter potato for the Government than deferring an annuity and I can see the pressure for a change will be immense."
A spokesman for Association of British Insurers, the trade body representing the financial services industry, said: "We are in favour of a pension fund being made into something more like a social security fund, so you can take money from it and use it for long-term care. But we did not expect any changes for this year's Budget."
Stewart Ritchie, director of pensions development at Scottish Equitable, one of the UK's top insurers, said: "The issues that would have to be considered include whether the amount set aside for long-term care, if it is not taken, can be passed on to children."Reuse content