The Chancellor announced a cut in the tax relief it allows on people?s contributions to company or private pension schemes, in his Autumn Statement today.
George Osborne said that the lifetime allowance, which is the maximum amount which can be saved in a pension fund and be eligible for tax relief, will be reduced from ?1.5m to ?1.25m in April 2014.
The annual allowance, which is the most that can be saved in any one year and be eligible for tax relief, will be reduced from ?50,000 to ?40,000.
Pension savings above these levels are taxed at 20 per cent for basic rate payers, 40 per cent for higher tax payers and 45 per cent for additional rate payers.
The changes will save the Treasury ?1 billion a year by 2016-17, out of the ?6.6 billion that people currently gain from the tax relief.
Mr Osborne said that 99 per cent of the population make annual contributions of less than ?40,000, which means that just 1 per cent of all people saving into pension schemes will be affected by the changes.
However the pension industry has raised concern that the cut could destabilise pension savings.
Joanne Segars, chief executive of the National Association of Pensions Funds (NAPF) said: ?People in a final salary pension who have worked loyally for the same employer for years and then get a pay rise, or a promotion, could end up with a tax bill of several thousand pounds.
?The self-employed and those nearing retirement desperately trying to ?catch up? by boosting their pension are also at risk,? she added.
The Chancellor has also been criticised for breaking a pledge not to cut the annual limit on pension tax relief, made in a document issued in October 2012.
The document, which was issued when a previous cut was made to the annual limit, says:
?The Government has decided that the level of the AA [annual allowance] will be set at ?50,000 from April 2011 ? Beyond the forecast period to 2015-16 the Government will consider options for indexing the level of the AA.?
Ros Altmann, the director-general of Saga, has called for Mr Osborne to acknowledge that he has broken this commitment.
Source: http://www.financemarkets.co.uk/2012/12/05/government-saving-1bn-by-cutting-pensions-tax-relief/
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