The limit fell to £1.5 million in April 2012 and then to £1.25 million last April. Currently, savings of over £40,000 a year and any pension pot over £1.25m are subject to a 55% tax.
The top 1% of taxpayers will now pay 27% of total income tax in 2015, up from 25% in 2010.
The Chancellor expects the cut to save around £600 million a year, but to affect fewer than 4% of pension savers currently approaching retirement.
Osborne added:
"I want to ensure those still building up their pension pots are protected from inflation, so from 2018 we will index the Lifetime Allowance."
Martin Reynard, Pensions Manager at London Chartered Accountants Blick Rothenberg LLP, said:
“With the lifetime allowance reduced, and greater flexibility for pensioners to access their funds without restriction, one wonders what impact this will have on property prices as those near pensionable age seek alternative investments, such as buy-to-let properties. This may dilute the positive impact of the new help to buy ISAs.
“The reduction in the lifetime pension allowance to £1m was not a surprise, but the index linking from 2018 was welcome following the systematic reduction in the allowance by £800,000 since 2012.”
James McLeod, head of pensions at AES International, commented:
“It is no surprise that the lifetime allowance has again been reduced. This has been on the Chancellor’s agenda for some time. And while George Osborne has predicted that only 5% of people approaching retirement will be impacted by the reduction, those who are effected could lose out substantially.
“Osborne has also not specified how this will impact those in defined benefit schemes – it may be the Government needs to offer express protection measures for those who have been in such schemes for some time.”
However founder and chief executive of deVere Group, Nigel Green, has warned:
“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, amongst 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.
“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.
“I fully expect that as the LTA changes bite, an increasing number of pension savers will look for alternatives. The ongoing cuts in the lifetime allowance will, I believe, serve as a catalyst for people to move their British pensions out of the UK and into an HMRC-recognised QROPS, an overseas pension in a secure, low-tax jurisdiction.
“When the pension pot is outside the UK, it will be exempt from the LTA limit – even if the pension pot increases beyond £1m over time. This is significant as the LTA could be cut further in the future.
“Similarly, those who transfer their pensions into a QROPS will typically benefit from being able to access flexible high-return investments and have their pensions paid in the currency of their choice, amongst other advantages.”
