Wealthy savers will see their annual and lifetime pension tax limits slashed in 2014-15 as part of George Osborne's deficit reduction plan.
During his announcement of the autumn statement on Wednesday, the chancellor announced the lifetime limit will be reduced by £250,000, from £1.5m to £1.25m, while the annual allowance is to be cut by £10,000 from £50,000 to £40,000. Mr. Osborne acknowledged the money-saving move would be unpopular among savers but said: "Those with the most should contribute the most, and they will."
The new lower lifetime allowance of £1.25m will start to affect heavy-saving medium earners such as head teachers, senior police officials and middle managers in the private sector - especially if they are members of generous defined-benefit pension schemes. A £1.25m pension pot will buy an annuity of £44,957 for a 65-year-old man at today's annuity rates.
Meanwhile, the new £40,000 annual allowance will impact the top 1 per cent of regular savers, with those adding lump sums to their pot near to retirement most at risk of exceeding it.
Vince Smith Hughes, retirement expert at Prudential, said savers should make the most of the current limits while they still can, but warned some people might want to spread this out to get the maximum tax relief.
Savers who are already over the lifetime limit can apply for protection against it so they don't have to pay extra tax on money they have already accrued. But as Investors Chronicle reported earlier this year, being auto-enrolled into a workplace scheme and failing to opt out after one month could invalidate this protection.
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