Much uncertainty surrounds the potential impact on the public coffers from changing the way pensions are taxed, the Institute for Fiscal Studies says.

The Government began examining possible reforms last summer as the Treasury launched a consultation. A report and policy reform proposals arising from this are expected to be made at next month’s Budget.

The three broad types of potential future system included retaining the current one but with cuts to the annual and lifetime contribution limits, a flat rate of tax relief, or moving to TEE (taxed–exempt–exempt) treatment of contributions.

The IFS said the longer term effects of the possible changes, in particular, were difficult to forecast.

In The IFS Green Budget published this week, the organisation said: “Depending on which of the options is chosen, the effect on the headline public finances over the next five years could be substantial, but the true effect on the underlying and longer-term fiscal position may not be so easy to glean from the numbers that will be presented on Budget Day.

“Any revenues lost in the longer term will not show up in the five-year forecast.”

People’s responses to the policy and how they behave as a result will be difficult to predict, the IFS said.

The report stated: “The assumptions made about this could have important effects on the policy costing, but the evidence base that could be used to inform them is patchy and any assumptions will not be verifiable for years to come.

“This means it would be very important for the OBR to publish estimates of the impact on revenues in future years and full details of the underpinning assumptions used to produce those estimates.”

On the flat-rate tax relief idea, the IFS said: “This policy – like the option of reducing the annual and lifetime limits – has the potential to increase tax revenues somewhat in the short term but potentially at the cost of slightly lower revenues in the longer term. The magnitude of these effects would depend on the precise policy design.

“The crucial issue of the impact on revenues in the longer term is even more uncertain. If lower- and middle-income individuals end up having larger pension pots (for example, because they choose to save more or just because of the higher amount of up-front tax relief), then tax revenue on the resulting pension would increase.

“But if higher-income individuals end up having smaller pension pots (due to them saving less or just because they received less up-front tax relief), then this would result in less tax revenue on the resulting pension. Any impact on household saving and spending decisions would also impact upon future indirect tax revenues.

The report added that whatever change the Treasury plumped for, there would likely be “complicated responses in the very short term before the policy is implemented”.