Chancellor George Osbourne announced a cut in the Lifetime Allowance (LTA) and an extension to pension freedoms to 5m annuity holders, in his final budget before the general election.
In a move expected to generate the Treasury savings of GBP 600m a year, the lifetime allowance will fall from GBP 1.25m to GBP 1m from April 2016.
The Chancellor said the measure would affect fewer than 4 per cent of pension savers approaching retirement, but critics say greater numbers will be affected.
Chief executive of the deVere Group, Nigel Green, said the reduction is "scandalously counter-productive".
"This pre-election gimmick is a disincentive to save as much as possible for retirement and therefore it could be harmful to Britain's long-term economic success," he said.
"With the burgeoning pensions crisis and looming care crisis, we need to urgently revitalise, promote, and nurture a savings culture in the UK as a matter of priority – and continually cutting the LTA goes against this concept."
He added that the move is a "slap in the face" for people who have worked and saved hard for retirement over their careers, saying: "It is nothing short of a dangerous cap on aspiration."
Stephanie Condra, retirement market strategist at AXA IM, however, said savers would not be deterred by the reduction.
"Retirement isn't just about how much you have saved in your pension; other savings and assets are often used to replace income when people finish working," she said.
"What is important is that people are educated on their options for retirement now, no matter whether they are in accumulation phase or drawdown."
Since being introduced in 2006, the LTA limit has been reduced several times, from GBP 1.5m in April last year, which followed a reduction from GBP 1.8m in 2011.
The National Association of Pension Funds (NAPF) said it hoped the latest cut was not a sign of more reductions to come.
"Let's hope past performance is not an indication of future cuts – the LTA has been cut by GBP 0.5m in the last three Budgets, which if repeated, would leave an LTA of GBP 0.5m and that would buy an income of around GBP 10,000 a year," said NAPF director of external affairs, Graham Vidler.
Mr Osbourne also confirmed plans to allow pensioners to sell their annuities.
From April 2016, tax rules will change allowing people who are already receiving income from an annuity to sell that income to a third party, subject to agreement from their annuity provider.
The proceeds of the sale could then be taken directly of drawn down over a number of years, and would be taxed at their marginal rate, in the same way as those taking their pension after April 2015.
Graham Vidler said: "This clearly fits in with the Government's agenda for pensions, but it's unclear how savers will be protected - we welcome the full consultation as it will be essential to ensuring a fair and balanced market."
First published 19.03.2015
Lindsay.sharman@wilmingtonplc.com
