Pension pot
Labour's shadow pensions minister told IBTimes UK that he is 'glad with the move Reuters

Labour has expectantly thrown its support behind George Osborne's decision to reduce the amount top earners can put into their pension pots without being taxed.

"On pensions tax relief, we support the restrictions announced in the budget – we are glad the government followed the approach we were calling for," Lord Bradley, Labour's shadow pensions minister, told IBTimes UK.

The chancellor's move, which was announced in his post-election emergency budget, means the tax-free allowance will eventually drop to £10,000 ($15,376) a year from the current rate of £40,000.

The restriction, which will come into force from April 2016, will apply to some of Britain's highest earners with annual incomes of more than £150,000.

The Treasury has estimated that only 1% of taxpayers will exceed the threshold and the measure will help pay for Osborne's plan to lift properties worth £1m out of inheritance tax by end of the parliament in 2020-21.

But the Institute for Fiscal Studies (IFS) warned ahead of the general election about the Labour and Tory plan to cut tax relief for pensions.

"We risk rushing towards something like chaos in the taxation of pensions for those on high incomes," said Paul Johnson, director of the IFS.

"There is a danger that the tax proposals being put forward through this general election campaign will have a long-term malign influence on our tax system and economic welfare."

Isas like pensions?

Elsewhere, Osborne also announced in his budget that the government had launched a green paper into taxing pensions like Isas.

"While we've taken important steps with our new single-tier pension and generous new Isa, I am open to further radical change," Osborne said. "You pay in from taxed income – and it's tax free when you take it out. And in between, it receives a top-up from the government.

"Our goal is clear: we want to move from an economy built on debt to an economy built on the more secure and productive foundations of saving and long-term investment."

Alan Higham, a retirement director at Fidelity Worldwide Investment, told IBTimes UK the proposal could work but "we need to think it through carefully".

He said: "The most important criteria really for me is: will it help encourage people to save? We're not saving enough for retirement, there will be a retirement crisis in up to 15 years' time and unless we can encourage people to save there is going to be a problem."

The pension expert said he was not sure the Isa-like measure would meet this test because people are sceptical of putting money into a retirement pot.

Higham said: "You should save for retirement in a pension [rather than in property] because it's the most tax-efficient way of doing it. If the government takes those tax incentives away, I'm not so sure many people will voluntary save for their retirement."

Summer budget 2015: Everything you need to know in 90 secondsIBTimes UK