The cost of collecting the proposed high earner's pension tax would almost cancel out any gains to the public coffers, according to analysis by Standard Life.
From April 2011, the Government hopes to raise an extra £3.6bn a year, partly through cutting the tax relief on pension contributions for people earning over £150,000.
People with gross pay of just £130,000 could be hit if the benefit of their employers' contributions pushes them above a proposed £150,000 limit.
But Standard Life says implementing the tax, which will hit around 300,000 people, will cost around £2.5bn. This is seven times higher than Treasury calculations which put estimate the figure at the £345m mark.
The insurer says the Treasury figures fail to account for major costs such as individual advice and the extra cost to providers of building alternative products in its impact assessment.
Based on the analysis, the price of administering the tax hike would effectively cancel out the money the Government expects to gain from the move, while further complicating the pensions system.
Standard Life says the ongoing annual compliance costs are also "hugely underestimated" by the Treasury at £130m. The insurer puts the annual burden closer to £435m.
Standard Life's head of pensions policy John Lawson says in a firm of 250 employees, implementation would cost £5,000 per employer.
He says this accounts for 10 to 15 hours per individual to learn about the new tax regime, in addition to the same amount of time and an additional cost for advice.
Lawson says: "Each employee could have income their employer doesn't know about. The adviser has to figure all this all out for all people caught in the £130,000 earnings range. For larger firms the cost would be more."
Whereas advice usually takes around eight hours, such a complex rule change could take twice as long to explain, he adds.
Standard Life is calling for a reduction in the annual allowance instead of the tax rise. It estimates the implementation costs for such a change would be £459m, saving over £2bn immediately, and less than one fifth of the implementation cost of the rules already legislated for in the Finance Act 2010.
In addition, it says ongoing annual costs would be approximately £118m; around a quarter of the annual cost of rules already legislated for in the Finance Act.
Lawson says: "This is inefficiency gone mad - pension savers, their employers and their pension schemes will have to spend £2.5bn so that HM Treasury can collect £3.6bn of tax.
"Given the burdens faced by people as a result of the recession, adding further unnecessary bureaucratic cost adds insult to injury.
"The problem stems from the mind-boggling complexity of these rules. A simple reduction to the existing annual allowance would cost only a fraction of this to implement."
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