Britain’s pensions industry has written to the chancellor to warn that a budget tax grab on retirement savings would be bad for the economy, and for workers.

In an open letter to the chancellor, the industry body Pensions UK and the Federation of Small Businesses have said that the £2 billion the policy would raise was “insufficient to merit the levels of disruption to saving, investment and growth”.

The group said the rumored changes could “weaken the foundations of the pensions system” and “encourage rushed decisions” by savers.

Leading pension and savings firms have also urged Reeves to abandon the plan before the budget on Wednesday.

What is the plan?

Salary sacrifice schemes allow workers to give up part of their wages in exchange for other benefits, predominantly pension contributions. The money comes out before it reaches your pay packet so it is not subject to national insurance in the same way that normal pension contributions are. Employers also save on their national insurance contributions.

Reeves could cap at £2,000 the amount that can be sacrificed without being liable for national insurance contributions. At the moment, you can pay up to £60,000 a year into your pension and get the full relief.

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Three-quarters of Pension UK’s members believe that savers are likely or very likely to alter their retirement contributions or decisions if Reeves limits the benefit, while 97 per cent said the leaks and rumours of what could be in the budget were damaging confidence in pension saving.

Jamie Fiveash, the chief executive of Smart Pension, which manages about £8.5 billion of pension savings, said: “Changes to salary sacrifice would be a false economy for the Treasury, offering a short-term political win while risking long-term financial damage for millions of savers.

“Salary sacrifice is a key incentive for people to save more, which is exactly what this country needs given the current savings gap and the future retirement crisis we are facing.”

A poorer future

Analysis from the Department for Work and Pensions shows that 4.6 million people are on track for a standard of living in retirement that is below Pensions UK’s “minimum”, based on how much they currently save.

Paying into a pension using salary sacrifice can lower your income below certain thresholds, such as the £60,000 child benefit threshold or the £100,000 cliff-edge over which you begin to lose your personal allowance and free childcare benefits.

Ten pension firms — Aegon, Aviva, Royal London, Mercer UK, Hargreaves Lansdown, AJ Bell, Interactive Investor, Now:Pensions, PensionBee and Smart Pension — told Times Money that a cut to the benefits of salary sacrifice could cause long-term damage to pension prospects.

“Any reduction in the amount that can be paid into pensions via salary sacrifice will undoubtedly have an impact on the amount being saved for retirement,” said Jamie Jenkins from Royal London, a pension firm with £181 billion of assets under management.

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“The government just formed a Pensions Commission which is primarily concerned with getting savings rates up, so this seems like a backwards step.”

In May, HMRC published a survey commissioned by the previous government looking at the impact of stripping back tax reliefs on salary sacrifice schemes, which many took as a sign that it was being looked at as a potential policy change at the budget. The taxman has previously denied that the research showed it was planning to make any changes, and HM Treasury said it did not comment on tax speculation outsidefiscal events.

AJ Bell said that if salary sacrifice were capped at £2,000, the pension pot of a 35-year-old worker earning £50,000 and using the scheme today would be worth about £22,000 less by the time they were 65. Someone earning £100,000 today would be £50,000 worse off at 65.

The calculations assume 5 per cent investment growth a year, 3 per cent annual pay rises and that the worker already has a £30,000 pension pot.

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Polling from the Association of British Insurers found that two out of five savers would pay less into their pension if the salary sacrifice scheme was capped. It also found that nearly half the employers who pay staff more than the minimum pension would consider reducing their contributions if they paid more national insurance on employer pension payments.

Employer national insurance contributions increased from 13.8 to 15 per cent at last year’s budget.

Tess Page from the pensions firm Mercer UK said: “The government should carefully consider the long-term individual and societal consequences of these changes, especially in the context of the ongoing Pensions Commission.

“Unless retirement saving incentives remain effective and employers can continue to support their employees’ long-term financial wellbeing, the state will end up shouldering an even greater burden.”