Labour has vowed to reverse Jeremy Hunt's decision to abolish the lifetime pension allowance in a move which threatens to plunge the Government's back-to-work drive into chaos.

Mr Hunt said the move to get rid of the £1.07 million allowance would "incentivise our most experienced and productive workers to stay in work for longer" and also "simplify our tax system, taking thousands of people out of the complexity of pension tax".

But Labour said scrapping the tax-free cap will "result in the top one per cent of pension savers getting a massive tax break for their retirement" as the party promised to undo the decision if it wins power at the next election. 

Rachel Reeves, the shadow chancellor, said: "At a time when families across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority, at the wrong time, for the wrong people.

"That’s why a Labour government will reverse this move. We urge the Chancellor and the Conservative Government to think again too."

With a general election likely just over a year away, any uncertainty over the future of the policy could damage the Government's hopes of boosting the workforce.

Mr Hunt said the decision to abolish the lifetime allowance was "primarily driven" by a desire to stop NHS consultants from retiring early. 

Told that the move would only benefit the wealthiest one per cent of people, the Chancellor told BBC Breakfast: "No, this is a change that is primarily driven because we have a big issue in the NHS which is doctors reducing their hours or retiring early just at the time the NHS needs them the most.

"The Royal College of Surgeons say that 69 per cent of their members have reduced their hours because of the way the pensions system works and we have a backlog of seven million people in the NHS. 

"By the way, this is a policy that Labour supported only in September, their health spokesman said the cap was crazy and it would save lives to get rid of it."

He added: "This is something that will take effect in two weeks' time. It will help the NHS at a moment when it most needs that support." 

Asked why the Government had not introduced a pensions policy specifically targeted at NHS workers, Mr Hunt said: "We looked at all the different options. The other options, if you had a scheme that was just for doctors it would actually be more aggressive because what we have announced doesn't help the very wealthiest doctors, it still keeps in a limit of the amount that you can put in tax-free every year. 

"But most importantly it is something we can introduce in two weeks' time and we can deal with a problem." 

Harriett Baldwin, the chairwoman of the Treasury Select Committee, said she was "very surprised" that the abolition of the cap on the lifetime pension allowance had not been limited to doctors.

The Conservative MP told a Resolution Foundation discussion this morning: "I was personally very surprised that the pensions cap was done to apply to everyone."

She said she was expecting it to "apply to those in NHS pensions schemes" but instead Chancellor Jeremy Hunt had opted for the "simpler approach which is doing it for everyone".

Why is Jeremy Hunt's decision to abolish the lifetime pension allowance controversial?

The decision to abolish the lifetime pension allowance has emerged as perhaps the most contentious of Jeremy Hunt's Budget announcements. Why is it controversial? 

The Office for Budget Responsibility said getting rid of the £1.07million allowance would "increase employment by around 15,000". 

So we are talking about a relatively small group of people. But the OBR said the cost of the policy will not be insignificant, coming in at about £1.2 billion a year in lost tax revenue. 

The Resolution Foundation think tank said that this amounted to a "cost of around £80,000 per extra worker". It also warned that the 15,000 figure "may be overstated". 

This is because scrapping the allowance will give people with large pension pots a significant tax cut and that could actually prompt them to retire earlier. 

It said: "And even those employment gains may be overstated, given that very large wealth boosts (someone with a £2 million pension pot has just received a tax cut of almost £250,000) will actually encourage some people to retire earlier than they otherwise would have done.

"This amounts to a large giveaway to a small number of higher earners who already benefit most from our approach to pension tax relief, while doing nothing for the over 80 per cent of workers outside defined benefit schemes who are not saving enough to accrue adequate pensions."

Mr Hunt said this morning that the abolition of the allowance was "primarily driven" by a desire to stop senior NHS staff from retiring early.