The amount people can tuck away in their pension each year has been slashed by a fifth.
The changes mean that the total you will be able to stash away each year will fall from the current £50,000 level to £40,000 in April 2014. That follows the savage cut from the previous £255,000 level announced by the Coalition in 2010.
The lifetime limit – the total amount you can put into your pension pot overall – has also been cut, from £1.5m to £1.25m.
The reduction in the lifetime limit will hit an elite minority: being able to build up a £1.25m pension fund is enough to generate a retirement income of £55,000 a year; or £1,000 a week, less tax. And the reduction will not stop people building up more in their pension pot to get a much higher retirement income. They just won’t get tax relief on the additional contributions.
But the reduction in the yearly limit to £40,000 could stick a spoke in the wheels of pension planning for many.
The £40,000 level is still pretty generous, but even middle-earners could be hit. Anyone who has been a member of a workplace pension scheme for years and gets a decent pay rise or a promotion could find they end up with an unexpected tax bill for breaching the annual allowance.
The Treasury said that cutting contribution limits will boost its coffers by £600m. Critics responded that the move was an example of the Coalition hitting the squeezed middle.
George Osborne admitted yesterday that the changes “will not be welcomed by everyone”.
While it is easy to assume that the move will only hit a few high-earners, the pensions industry complained of an underlying disregard for retirement planning.
“What we desperately need is stability, so that people can trust the pensions system and get on with saving for their old age, instead of being treated like a cashpoint when things go wrong,” Joanne Segars, chief executive of the National Association of Pension Funds, said.
“The Government will take twice as much from this tax hit on pensions as it will from the increase in the bank levy.
“That cannot be fair, and will only undermine confidence in pension saving.”