Chancellor George Osborne has announced plans to cut the annual allowance for tax-incentivised pension saving from £50,000 to £40,000 and reduce the lifetime allowance from £1.5m to £1.25m in 2014/15.
It is the second time Osborne has announced a reduction in pension tax allowances since becoming chancellor in May 2010. In April 2011, the yearly cap on tax-free pension contributions was reduced from £255,000 to £50,000 while the lifetime allowance was reduced from £1.8m to £1.5m in April this year.
The decision to cut pension tax incentives again has been widely criticised by the industry.
Hargreaves Lansdown head of pensions research Tom McPhail says: “Every time a chancellor tinkers with the rules governing our pensions, they undermine investors’ confidence in saving for their retirement.
“This announcement is robbing our future prosperity in order to bail out the costs of past mistakes.”
Association of British Insurers director general Otto Thoreson says: “Changing pensions tax allowances for the second time in three years is frustrating.
“It is now vital that ministers commit to these thresholds and avoid further tinkering if long-term savers are to be encouraged to put aside income for their retirement.”
The Government is considering introducing a “personalised protection regime”, in addition to a new form of fixed protection, for people who think they will be affected by the lifetime allowance cut.
The personalised regime, if introduced, would cover those with pension pots valued at more than £1.25m on 6 April 2014. AJ Bell says this version of protection will allow people to continue paying contributions into their pension.
Pension experts say individuals will be able to apply for the new fixed protection from summer 2013, after the legislation has come into force.
For defined-contribution savers who apply for the new fixed protection, no further pension contributions will be allowed from 6 April 2014, while defined-benefit members will need to stop building up benefits from this date.
Forty Two Wealth Management partner Alan Dick says: “Because the Government constantly tinkers with pension tax, you end up with a system of complex rules to make sure people do not lose out as a result.
“This is necessary but the danger is that the level of complexity puts people off saving into a pension altogether.”
Rowanmoor Pensions head of pensions technical services Robert Graves says: “It was perhaps depressingly predictable that the lifetime allowance and annual allowance would be reduced as it is a way of the lessening the short-term impact of pensions tax relief on the exchequer.
“However, there is a risk that this constant meddling will alienate people from pensions and ultimately destroy a longer term policy objective of ensuring individuals do not risk falling back on the state in retirement.”