The chancellor has announced in his Budget that from 2018 the lifetime allowance for pensions tax relief will be indexed, as he confirmed leaks that the allowance would be cut from £1.25m to £1m on the back of a major increase in the cost of relief.
Speaking earlier today (18 March), George Osborne said: “I want to ensure those still building up their pension pots are protected from inflation, so from 2018 we will index the lifetime allowance.”
Lifetime allowance for pensions tax relief has also been slashed from £1.25m to £1m from 6 April 2016, as predicted yesterday. Mr Osborne said that this will save around £600m a year, with fewer than 4 per cent of pension savers currently approaching retirement affected.
He added that the measure had been made necessary by a huge increase in the cost of tax relief on pensions to £4bn.
Mr Osborne said that the reason for these changes was “so that everyone contributes their fair share to reducing the deficit”.
He pointed out that over 96 per cent of individuals currently approaching retirement have a pension pot worth less than £1m, “so this change will affect only the wealthiest pension savers”. Critics have said younger savers joining now will face a major cap on their saving.
In the move to slash the lifetime allowance for pensions tax relief from £1.25m to £1m, transitional protection for pension rights already over £1m will be introuduced alongside this reduction, which the government said was to ensure the change is not retrospective.
He added: “We have had representations that we should also restrict the annual allowance for pensions and use the money to cut tuition fees.”
However, he said that this would involve “penalising moderately-paid long-serving public servants” and agreed with the opposition that “such a policy would neither be progressive or fair - and we won’t do it”.
ruth.gillbe@ft.com
