An assault on tax-free pension perks for the rich was confirmed today as the latest Government tactic to cut the public spending deficit.
The amount people can pay annually into a pension plan and still receive tax relief is to be reduced to less than a fifth of its current level to save £4 billion a year.
The tax-free amount is being cut from £255,000 a year to just £50,000 from April next year.
And the lifetime pensions allowance – the total amount in a pension pot benefitting from tax relief – will be reduced from £1.8 million to £1.5 million from April 2012.
Ministers insisted that the changes would hit only the very rich, but pensions experts were quick to point out that many middle class professionals earning more than £80,000 a year would be hit – particularly those in the public sector paying into final salary schemes.
The Government steered away from more controversial measures, by deciding to continue to pay high earners tax relief on pension savings at the highest rate at which they pay income tax.
The changes come just a week after the coalition Government hit the middle classes by announcing that it would no longer pay child benefit to higher rate tax payers from 2013.
The Government said today’s measures would affect only around 100,000 people, 80 per cent of whom earned more than £100,000 a year.
It added that it would protect workers on low and moderate incomes “as far as possible” by allowing people who exceeded the annual allowance due to one-off spikes in pension accrual to offset them against their unused allowance from previous years.
Financial Secretary to the Treasury Mark Hoban said: “We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.
“The coalition Government believes that our system is fair, will preserve incentives to save and - compared to the last Government’s approach - will help UK businesses to attract and retain talent.”
The new rules were welcomed by industry bodies and business groups.
Maggie Craig, director general of the Association of British Insurers, said: “It is right that this plan keeps the important principle of pension tax relief at the marginal rate of tax paid.
“This will help keep those senior decision-makers, responsible for staff pension schemes, engaged and supportive of pension saving.
“The ability to roll over any unused allowance over three years is sensible and will retain much-needed flexibility in pension planning, especially for those nearing retirement.”
John Cridland, CBI deputy director-general, said: “Today’s announcement is not as bad as feared. The Government had considered making the annual allowance as low as £30,000.
“It rightly heeded warnings about the impact that restrictive regimes can have on pension saving, and these new proposals are a significant improvement on the approach proposed by the previous government, which was simply unworkable.”
Andrew Tully, senior pensions policy manager at Standard Life, said: “The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want.
“This change means pensions will continue to be an attractive home for long-term savings, retaining the unique advantage of an upfront tax incentive from the Government.”