The amount people can save into a pension throughout their lives free of tax has been cut to £1m.
George Osborne made the announcement during his Budget speech on 18 March. The limit before the cut was £1.25m.
Osborne also announced that from April 2018 the lifetime allowance (LTA) would rise in line with the Consumer Prices Index.
It is thought transitional arrangements to protect people who are at or nearing the £1m mark will be introduced.
Currently savings of up to £40,000 a year qualify for tax relief, but there is an upper limit of £1.25m over the lifetime of a pension pot, following which a tax charge of 55% applies.
The limit has been cut several times since its introduction in 2006, falling from £1.5m in April last year, following a reduction from £1.8m in 2011.
Turning to plans outlined by Labour, which would have seen the annual allowance cut to reduce the cost of tuition fees, Osborne dismissed the idea.
He described the suggestion as “neither progressive nor fair so we won’t do it”. He added it would penalise moderately paid public sector workers and was unworkable.
‘Cap on aspiration’
Budget documents said: “Over 96% of individuals currently approaching retirement have a pension pot worth less than £1m, so this change will affect only the wealthiest pension savers.”
However, even if the lifetime allowance were frozen for the next 25 years, it would act as a “disincentive” to saving, according to analysis, which said the £1.25m limit will already affect workers who retire on anything from £20,000 a year over their lifetime.
Many public sector workers, such as doctors, dentists and civil servants could be affected by the cut.
deVere Group chief executive Nigel Green said it was a “dangerous cap on aspiration”.
He said: “Another reduction in the lifetime allowance 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.
“With the burgeoning pensions crisis and the looming care crisis, among many other factors, we need to urgently revitalise, promote and nurture a savings culture in the UK as a matter of priority. Continually cutting the LTA goes against this concept.”
He added: “This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives, in order to be able to enjoy their desired retirement. It is a nothing short of a dangerous cap on aspiration.”
Nucleus pensions technical manager Jon Gwinnett said: “Further reductions in the lifetime allowance seem unnecessary. They mean that many more people will be brought into scope of the tax charges which penalise those fortunate enough to exceed the limit.
“There’s a danger that the creeping expanse of scope means that people in middle-ranking public sector jobs will need to consider the impact of the LTA on their pension plans.
“It also begs the question, yet again, of why we persist in having a restrictive annual allowance if government see the LTA as the means of regulating total pension saving and tax relief expenditure.”