Further cut to pensions annual allowance could be counterproductive, says expert

Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that further cuts would create uncertainty around savings designed to be "long term". The Financial Times has reported that Chancellor of the Exchequer George Osborne met with senior Government officials on Monday to discuss the potential change, which could be introduced as part of his Autumn Statement next month.

The annual tax-free pension contribution limit was lowered from £255,000 to £50,000 from April 2011 as part of the Chancellor's 2010 emergency budget. This includes contributions made to an individual's pension scheme by an employer, as well as any one-off lump sums the saver pays in, although any unused allowance may be carried forward for up to three years. The Government has previously consulted on reducing the allowance to between £30,000 and £45,000, while the Liberal Democrats have proposed scrapping higher rate pension tax relief altogether.

"Those higher earners affected will reduce their pension savings to avoid the impact of the lower annual allowance, and will start to wonder when the next hit against their pension savings will strike," Tyler said. "At a time when, through auto-enrolment, the Government is trying to boost confidence in pensions saving, pecking away at some of the benefits may be counterproductive. Savers need to know that the rules of the game won't keep changing each time the Government needs to raise more tax revenue."

Cutting the annual allowance was suggested earlier this year as a way of funding the increase in the income tax personal allowance. The amount that people will be able to earn before they have to start paying income tax increased to £8,105 this year, and is set to rise to £9,205 by 2013. While there was ultimately no change to the pension annual allowance, age-related allowances for existing pensioners are to be aligned with the tax-free personal allowance for those of working age. Future increases in the state pension age will also be automatically linked to increases in longevity.

Analysis from Standard Life published by Money Marketing in February showed that cutting the annual allowance from £50,000 to £40,000 would save the Treasury £600 million, while a further reduction to £30,000 would save between £1.6 and £2.6 billion.