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Cap on pensions tax relief to be reduced

The annual tax-free amount that individuals can invest into a pension will be significantly reduced from next April, the Government has announced.

Last week the Treasury confirmed that the annual allowance for tax-privileged pension saving is being cut from £255,000 to £50,000 – a move that is expected to save around £4bn a year.

The Government claims that an annual allowance of £50,000 will affect 100,000 pension savers – 80% of which it said will have incomes over £100,000.

It was originally thought that the cap on tax relief would fall to a figure between £30,000 and £45,000.

In addition, the lifetime allowance on money that can be accrued in a pension fund and still receive tax relief, is set to fall from £1.8 million to £1.5 million.

While the new annual allowance will come into force in April 2011, the cut in the lifetime allowance will not take effect until April 2012.

Announcing the changes, Mark Hoban, the Financial Secretary to the Treasury, said: ‘We have abandoned the previous Government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.

‘The Coalition Government believes that our system is fair, will preserve incentives to save and - compared to the last Government's approach - will help UK businesses to attract and retain talent.’