Lib Dems accused of planning £4bn raid on pensions

The leader of the Liberal Democrats said the party's tax commission was considering axing the current 40 per cent top-rate tax relief on pension contributions. Instead, taxpayers would only be able to claim back the basic rate of 22 per cent on pension payments, a move the party estimates would save the Treasury £4bn.

Sir Menzies said the money would be used to fund tax cuts for low and middle-income families.

But Labour and Conservative MPs criticised the plans, arguing that they would cut incentives for people to save for their retirement at a time when it was important to boost saving to help avert a long-term pensions crisis.

Nigel Waterson, the shadow Work and Pensions minister, said: "This is a desperate attempt by the Liberal Democrats to make their recent tax proposals add up. Thousands of people have already lost their pensions because of Gordon Brown's £5bn annual tax raid on pension fund dividends and now the Liberal Democrats are proposing another pensions tax, this time on personal contributions.

"At a time when we should be encouraging people to take responsibility for their retirement this proposal would provide a clear disincentive to save."

Sir Menzies hinted at the policy change as he outlined the party's plans to shift the burden of tax towards environmental charges in a major speech to senior figures in the City yesterday.

He told an audience at the London Stock Exchange: "We are also considering a proposal - and this may well not make us popular throughout every section of the City - to restrict tax relief on pension contributions to the basic rate of income tax. Money from these changes would be used to cut taxes for those on low and middle incomes."

The proposal is being examined by the party's tax commission, chaired by its Treasury spokesman Vince Cable, which will report within three weeks.

Senior party figures insist that middle earners will not be worse off because the party plans to take many people out of top-rate tax by increasing the threshold to earnings above £50,000 a year. They say millions more will be taken out of tax altogether by raising the threshold at which people start paying basic-rate tax.

Mr Cable said: "Middle-income people will be getting substantial help with taxation. Their tax will be cut on their income and they will get great discretion to invest more in their pensions if they wish to do so. There is no justification for having very substantial public subsidy for pension contributions for high earners."

John McFall, chairman of the Commons Treasury Select Committee, said: "This comes at a very odd time. When the Government is trying to give every encouragement for people to save for pensions in later life, this cuts across those proposals. It goes against recommendations by Lord Turner and others to encourage savings. Instead, this will do the reverse. It is well-intentioned but naive."