The Treasury is to cut the annual allowance for pension saving from £255,000 to £50,000 from next April.
The change will affect 100,000 pension savers, 80 per cent of which have incomes above £100,000, according to the Treasury. Pension savings above this level will be subject to a 55 per cent tax charge. Individuals paying 50 per cent tax will be able to claim relief at the full marginal rate.
Individuals will be able to offset unused parts of the allowance over a three year period to allow for one-off spikes in contributions over the £50,000 limit.
The lifetime allowance will be cut from £1.8m to £1.5m in April 2012. The Treasury will consult later this year about measures to help those who are close to and may breach the new limit.
For defined benefit schemes, increases in benefits will be valued at a factor of 16 compared to the current factor of 10. The increase is less than many had expected.
Treasury Financial Secretary Mark Hoban says: “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 structure was put to consultation in July following widespread criticism of the previous administration’s proposal, the High Income Tax Relief Charge, which involved an earnings test, an age-related method of valuing final salary and other defined benefit pensions, and a complex tapering of tax relief for earnings between £150,000 and £180,000.
At the time, the Treasury said Labour’s approach could have “unwelcome consequences” for pension savings, bringing significant complexity to the system and damaging UK business and competitiveness.
However, Chancellor George Osborne insisted the alternative would have to provide at least as much revenue (£3.5bn) as the previous proposals.
If the amended approach is adopted, the restriction of pensions tax relief would take effect from April 6, 2011 and be legislated for in the Finance Bill next year.
Standard Life senior pensions policy manager Andrew Tully says: “’I welcome the Government’s move to replace the exceptionally complex changes which were due to be introduced from next year. An annual allowance works in the same way as Isa limits so is simple, clear and easy for people to understand. The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want.”