This annual allowance will include money paid in by employers as well as contributions from employees' pay. At present, savers can pay a maximum of £255,000 a year into a pension, although this is complicated by a Labour scheme to claw back higher-earners' tax relief.
The other big change is that the cap on the maximum value of a pension pot will be lowered. The 'Lifetime Allowance' will be trimmed from £1.8m to £1.5m in 2012, though measures will be put in place to protect those whose pension funds are already worth more than £1.5m.
The Treasury estimates 100,000 savers will be caught by the new rules, 80% of whom earn £100,000 a year or more. But experts say this number will increase over time unless the allowances rise in line with earnings.
The new regime is less draconian than had been feared. The Government had initially considered cutting the annual allowance to £30,000. And the rules are far simpler than the complex proposals from the former Labour government that could have raised a similar amount for the Government, but would have been likely to have proved an administrative nightmare. Under rules already implemented, anyone who is earning £130,000 or more has their tax relief capped.
Crucially, savers will get tax relief at their highest rate on every penny paid into a pension. So a 50% taxpayer gets back 50p in the pound. Andrew Tully, pensions policy manager at financial services provider Standard Life, says: 'The Government has listened. These rules are simpler, easier to explain to savers and are cheaper to administer.'
One key concession is the reintroduction of 'carry-forward' rules. These will allow savers to go back up to three previous tax years to hoover up unused allowance, enabling them to pay up to £200,000 into a pension in one go. This will give some protection to the self-employed and those running their own businesses who have irregular incomes. They will be able to pay extra into pensions in bumper years or when they come to sell the business.
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Sarah Lord, wealth planning director at Killik & Co, in Mayfair, central London, says: 'The rules will apply from April, going back to the tax year 2008-09.
'So there is a useful chance for those who held off making pension contributions because of the recession and credit crunch to catch up next year.'
Carl McColgan, a director of wealth manager Ashcourt Rowan in Manchester, says: 'We will be encouraging clients to start their pension saving earlier and work towards the target of saving £50,000 a year, rather than waiting until later and saving bigger sums.'
Peter Owen, 62, is relieved that the new rules will allow him to carry on saving. Peter, who lives near Esher, Surrey, runs his own marketing consultancy and is making up for lost time on retirement saving by paying in as much as he can afford to his Aviva personal pension. He aims to pay in 25% of his earnings, and in a good year even more. As a 40% tax-payer, tax relief makes his saving almost doubly worthwhile.
He was concerned that a lower annual contribution limit, say of £30,000, might restrict his savings and was also worried about any further attacks on pensions relief.
Peter says: 'The proposals are not as bad as had first been thought. I've got the green light to carry on with my saving and try to put as much as I can afford into my pension. The tax relief makes it by far the most efficient way to save.'
Those who are members of a final salary pension scheme will also be caught by the rules. Here, a complex formula will be used to test the annual increase in the value of their pension against the £50,000 limit.
Each £1 of extra pension they are entitled to is treated as £16 of pension contribution. This could see those workers with long service who get a promotion and pay rise suddenly facing a shock tax bill because the value of their pension pot is deemed to have increased by more than £50,000.
Again, the Government has listened to pension experts. It will allow the impact of any pay rise on the pension to be phased in over three years, protecting most workers. Those who retire early with an enhanced pension because of ill-health will also be protected.
But workers whose pensions are boosted as part of a redundancy deal could be hit with a tax bill. And there are concerns that the reduction in Lifetime Allowance could hit those who want to retire relatively young.
Tim Stalkartt, head of financial planning at London adviser Bestinvest, says that the amount of pension a £1.5 million pot can buy is surprisingly low. At current annuity rates, a man aged 60 with a wife aged 57 and a £1.5 million fund would be able to buy an inflation-protected income of £2,121 a month after tax, once the couple have taken the maximum tax-free cash of £375,000.
Those with small pensions will be protected. Current rules allow for those with a pension worth one per cent of the Lifetime Allowance - £18,000 - to take the whole pot in cash, rather than being forced to buy a token annuity. The £18,000 limit will remain, despite the lower Lifetime Allowance.
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