05/12/2012 09:05 GMT | Updated 12/03/2013 10:55 GMT

Autumn Statement: Entrepreneurs, Redundant And Public Sector Workers Hurt By Pension Tax Relief Cuts

Entrepreneurs, managerial public sector workers and those made redundant will suffer as a result of the cuts to pension tax relief, announced in the government's Autumn Statement.

Delivering his statement on Wednesday, chancellor George Osborne confirmed that the lifetime allowance will drop from £1.5 million to £1.25 million, and the annual allowance will reduce from £50,000 to £40,000.

While these figures might sound enormously big, a £1.25m life time allowance would only buy an annuity of less than £40,000 a year, according to one financial adviser.

In 2011, the pensions industry were concerned the annual allowance would be cut to £30,000 from the original figure of £255,000 - he then chose to cut the rate to £50,000 - so this is the second attack on pensions tax relief from this government.

"This will reduce the cost of tax relief to the public purse by an extra £1 billion a year by 2016-17," Osborne told the House of Commons.

"Ninety-eight percent of people currently approaching retirement have a pension pot worth less than £1.25m. Indeed, the median pot for such people is just £55,000.

"(And) 99% of pension savers make annual contributions to their pensions of less than £40,000; the average contribution to a pension is just £6,000 a year."

Osborne conceded his changes to pensions tax relief would "not be welcomed by all" but insisted everyone was obliged to show "we must show we're all in this together".

Simon Nicol, pensions director at corporate benefits firm Broadstone, told the Huffington Post UK he was "deeply disappointed" by the chancellor's decision to reduce the annual allowance.

"Today's Autumn Statement was the chancellor's opportunity not to pick the low hanging fruit and avoid making cheap political points by kicking the pensions industry, again," he said.

“We had high hopes for the coalition government when they repealed Labour's ludicrous plans to cap tax-relief for high earners early on in their tenure. However, the Chancellor's third Autumn Statement sees him reduce tax-relief on pension contributions for the second time.

"Meanwhile, pensions minister Steve Webb must be sitting in his office with his head in his hands as the Treasury undoes the confidence he has tried to instil in the pensions system.

“This latest attack on pensions tax relief is not just going to hit high earners. Many ordinary workers like teachers, police officers and fire fighters will be hit by tax charges simply by having a long career or receiving a promotion."

Gary Richards, corporate tax partner at law firm Berwin Leighton Paisner, warned the move could even lead to some of the most experienced public sector workers to retire early, rather than riks being hit in 2014. "So much for a stable investment regime for retirement," he added.

Entrepreneurs, who often look to put in large sums of money irregularly, could also be affected by the move, according to Ian Malone, pensions lawyer for Taylor Wessing.

Those who depend on their bonuses to fund their pension schemes instead of their salary and those who have been made redundant and want to put any compensation into a pension would also be affected, he told Huff Post UK.

"It could also be a tough break for defined benefit scheme members who have had a comparatively small salary increase which also increases the value of their scheme benefits," he continued.

Public sector workers such as teachers, who often have generous pensions, could be affected by the reductions

"It is questionable whether reducing the tax efficiency of pension savings in order to pay for short-term priorities really fits the message that everyone should be planning for retirement.

"In a year which has seen Theo Paphitis and Karen Brady bracketed by workers in hi-vis declaring 'I'm in', these changes might cause the average worker to wonder exactly what it is they are getting into."

Paul Sweeting, European head of strategy at JP Morgan Asset Management, echoed the thoughts of many in the pensions industry when he said that while the number of people affected might be small, there are bigger issues to consider.

"If there are doubts over the future tax treatment of pensions, people at all income levels might be less willing to save into pensions vehicles," he explained.

Chas Roy-Chowdury, head of tax at the Association of Chartered Certified Accountants, agreed, adding: "I cannot say it is remotely sensible to keep messing around with peoples' long term plans. Pension tax relief being reduced to £40,000 per year gives out all the wrong signals to those who are trying to save in order to stay independent in old age."

However, Roy-Chowdury conceded to Huff Post UK that in the short term, the reduced relief may potentially mean people will spend more and help stimulate the economy.

There is a possibility that savers could put more into their pension this year before the changes come into force in April 2014, but there may be details in the full report which could prevent this - known as anti-forestalling measures.