Private sector workers are on red alert for a 'disastrous' raid on retirement funds in the Budget while their taxes continue to protect 'gold-plated' public sector pensions.

The raid could cost a 30-year-old private sector worker on the average salary, £13,000, or 5 per cent, of their eventual pension pot at age 67, This is Money calculations show. 

Chancellor Rachel Reeves is expected to make employers start paying National Insurance on pension contributions to help plug the hole in Britain's public finances in next week's Budget.

The Government is said to believe this could dodge breaking Labour's manifesto pledge not to raise taxes on working people, although experts warn workers will ultimately bear the cost.

Currently, pension contributions are exempt from employer national insurance charged at 13.8 per cent.

Leading industry experts say that imposing NI on employer pension contributions could lead them to scale back what they pay into workers' pots.

Based on This is Money calculations this would leave the worker with their retirement fund worth £244,000.

Down from the £257,000 it would have accrued in value under the previous government.

But while businesses would have to absorb the extra cost, the Treasury is reportedly planning to find a way for taxpayers to reimburse the NHS and other public sector employers.

Former Pensions Minister Ros Altmann calls this 'unjustifiable' and 'disastrous', while financial expert Tom Selby of AJ Bell also says giving the public sector a 'get-out-of-jail-free card' would be difficult to justify. 

Baroness Altmann said: 'Ending employer NI relief, especially if only for private sector, would be disastrous.

She added: 'Damaging private sector workers, and their employers, while forcing them to pay for even better public sector pensions, would be a serious mistake.'

The Treasury is considering repaying the cost to the public sector because forcing it to cough up extra funds for NI could bring problems for generous defined benefit pensons and spell cutbacks to schools, hospitals and other public service budgets.

The Government would therefore need to reimburse them for the new costs, while private sector employers bore the brunt of the move.

Retirement experts warn raid would hit pensions 

Employers' response to a potential new tax on pension contributions is unclear but it is expected to affect hiring, wage and pension contribution decisions, to the detriment of workers.

However, while a new 13.8 per cent NI tax on pension contributions would probably encourage employers to be less generous, they would have to consult on changes before watering down benefits.

They are also likely to weigh up the attractiveness of their pension scheme as a recruitment and retention tool - and whether cuts would hit their own pensions too.

Steve Webb, former Pensions Minister and This is Money's retirement columnist, says applying NI to employer pension contributions would initially affect all employers.

But if the Government boosted public service budgets to make up the shortfall, it would only be private sector employers who were out of pocket.

Webb, a partner at LCP, adds of employers' likely reaction: 'They may well decide to do less – obviously assuming they were already above the auto enrolment minimums.

'So private sector workers would, over time, get less generous pensions than would otherwise have been the case, further widening the gap in quality between public and private sector pensions.'

Pensions campaigner Ros Altmann, who now sits in the House of Lords, says: 'Ending National Insurance relief only for private sector employer pension contributions is unjustifiable.

'If public sector schemes can’t cope with ending this relief, it is a clear indication that private sector schemes will struggle and this change should not happen at all.'

She added: 'Abolishing National Insurance relief for employer pension contributions may sound attractive in theory, but in practice it may up-end auto-enrolment.'

Tom Selby, director of public policy at AJ Bell, says: 'Increasing costs on employers will inevitably hit workers, either through pay restraint or scaled back pension contributions.

'Applying NI to private sector companies while giving the public sector a get-out-of-jail-free card would be more difficult to justify, however, particularly given public sector pensions are far more generous than their private sector equivalents.

'If the Chancellor is going to go down this road, she needs to offer some sort of certainty to workers about their pensions in return.

'Committing to a Pensions Tax Lock, which would guarantee both pension tax relief and tax-free cash entitlements remain untouched for an extended period, would at least allow hard-working Brits to plan for the future knowing the goalposts won’t be constantly moved.'

Private vs public sector pensions 

A direct comparison of pension outcomes isn't possible, as the fallout from extra NI costs is unpredictable, plus pensions work very differently in the public and private sectors.

But an NI raid on pension contributions would only serve to widen the gap between defined benefit public sector pensions and far less generous defined contribution private sector schemes.

The former guarantee a retirement income, whereas the latter force employees to take on stock market investment risks to build up their own pot to live on.

In the public services, both employer and staff contributions are higher, but retirees get a guaranteed pension for life linked to the salary they earned during their working lives.

For example, the Teachers Pension Scheme sees workers pay in between 7.4 per cent and 11.7 per cent, depending on earnings, while employers contribute a sum worth 28.68 per cent of salary. 

In return, teachers accrue  1/57th of pensionable earnings for that year including any overtime. The scheme means after 40 years a teacher could have a guaranteed annual pension income worth 40/57ths (or 70 per cent) of their 'career average' earnings.

If you work in the private sector, defined contribution pensions dominate. They take contributions from both employer and employee and invest them to provide a pot of money at retirement.

They are stingier and savers bear the investment risk, rather than employers, while they build up a pot that they must eventually turn into retirement income themselves.

Minimum contributions are set by auto-enrolment, at 5 per cent from the employee and 3 per cent from the employer, but many employers are more generous because they want to encourage recruitment and retain existing staff.

For example, many offer a deal where they match higher pension contributions by their staff, often up to 6 per cent of salary. 

It is these more benevolent employers that are most likely to cut back on staff benefits and pension contributions that they shell out voluntarily.

Many private sector employers also run salary sacrifice schemes, which cut their own and their staff's NI bill by diverting earnings into pensions instead.

If employers can no longer make NI savings, they might ditch such deals for staff.