Autumn Statement 2012: Major pension changesDrawdown levels increased but high earners hit

05 December 2012

George Osborne

In his third Autumn Statement , the Chancellor announced that the annual allowance on pension contributions would be reduced from £50,000 to £40,000 in 2014/15. This comes after the allowance was cut from £255,000 to £50,000 in last year’s Budget.

He also revealed that the lifetime limit on pension contributions would be reduced from £1.5m to £1.25m for the year 2014/15. This means that many wealthier savers still have a year in which they can boost their pension contributions. He said that these tax measures combined would save £1bn.

Bad news for higher earners

Osborne justified the measures by saying that they would not affect most pension savers in the UK, saying that 99% contribute less than £40,000 per year, with the average contribution standing at £6,000.

But he said he recognised that these cuts would not be welcomed by higher earners. He said: 'This will not be welcomed by everyone, but deficit-reducing measures never are. But we have to show that we are all in it together, and it's fair to look at tax relief on the top 1% of earners in the country.'

The cuts will also hit public sector workers harder than the rest of the population. This is because they tend to receive larger employer contributions, which could push them over the £40,000 annual limit.

Rates to improve for savers in capped income drawdown

There was better news for savers in income drawdown. Today the Chancellor announced that the maximum amount drawdown savers can take would be restored to the 120% limit, meaning that people in drawdown will see their annual income increased. You can learn more about how drawdown works in our guide to Annuity alternatives.

In 2010, the maximum amount savers could take their pension income at was reduced from 120% of the annuity you could buy (known as the GAD rate) to 100% in 2010, to prevent pensioners from depleting their pots too quickly.

The government has been under pressure in recent months to secure a better deal for people in drawdown, who have been seeing their retirement incomes plummet as a result of both falling gilt yields and the 2010 cut to maximum annual income.

State pension increases

There was also good news on the state pension front. Mr Osborne announced that the weekly amount pensioners can claim from the state has increased more than it has at any point in history.

Thanks to the 'triple lock' introduced by the Government in 2010, the state pension has increased by 2.5% to £110.15a week, which is more than both earnings and inflation. The triple lock switched pension rises from the retail prices index (RPI) to the consumer prices index (CPI).

More on this...