The Treasury has confirmed the annual allowance for tax-privileged pension saving will be cut from £255,000 to £50,000.
Mark Hoban, financial secretary to the Treasury, also announced the lifetime allowance will be slashed from £1.8 million to £1.5 billion.
The move, designed to raise £4 billion per annum to reduce the record budget deficit, will replace the former Labour government’s plans to reduce the tax relief on pensions for higher earners. An annual allowance of £50,000 will hit 100,000 savers, 80% of whom have incomes of more than £100,000.
The reduced annual allowance will be effective from April 2011 and the lifetime allowance will be cut in April 2012.
The government also said it is committed to protecting individuals on low and moderate incomes as far as possible. Individuals who exceed the annual allowance due to one-off “spike” in accrual will be allowed to offset this against unused allowance from previous years.
The government will also consult on options enabling people to meet tax charges out of their pensions in November.
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 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.”
Adrian Boulding, pensions strategy director at Legal and General, said: “This is good news for people who need to save for retirement. The introduction of a single, annual tax-free contribution of £50,000, will create a simpler system of tax on long term savings and preserve incentives for consumers to save at all levels of the salary scale.
The government should, we believe, also consider linking the annual allowance to the earnings inflation index to ensure that the incentive for consumers to save does not become eroded over time.”
Boulding added the new allowance meant high earners may need to consider using vehicles such as individual savings accounts (Isas) and maximum investment plans (MIPs) for retirement planning, rather than paying the full rate of tax on contributions above the annual allowance.
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