Pensions allowance cut by 250k

The lifetime allowance for pensions will be cut from £1.25m to £1m, George Osborne has announced in the 2015 budget.

The chancellor said in his speech to the House of Commons: 'From next year, we will further reduce the lifetime allowance from £1.25m to £1m. This will save around £600m a year.

'Fewer than 4 per cent of pension savers currently approaching retirement will be affected.'

Osborne also said that from 2018, the lifetime allowance will be indexed to protect against inflation.

The National Association of Pension Funds' director of external affairs, Graham Vidler, has welcomed the changes, but has voiced concern about the consistent erosion of the lifetime allowance and what the situation may be in a few years time.

'The Chancellor's commitment to index-link the lifetime allowance from 2018 is welcome,' he said. 'But the question remains, what will the LTA [lifetime allowance] be in three years' time?'

'Let's hope past performance is not an indication of future cuts. The LTA has been cut by £0.5m in the last three budgets, which if repeated would leave an LTA of £0.5m. This would buy an income of around £10,000 per year.'

Annuities extension

The chancellor also confirmed that pension freedoms allowing savers to withdraw from their pension pots whenever they like will be extended to the 5m people who currently have an annuity.

People locked in an annuity will be able to sell it from April 2016, creating an unprecedented annuities market which has prompted many financial advisers and industry bodies to advise a cautious transition.

Tim Wixted, of professional negligence solicitor's NeglectAssist, believes that the policy could create as many problems as it solves.

'Besides the problems from misselling, moving out of an annuity means their income stops being stable and starts being more unpredictable,' said Wixted. ' For instance, many funds are ultimately linked to equities, so if the stock market crashes, retired people would be left in a disastrous situation - they can't wait five or ten years for markets to recover.'

He added: 'We are not a nation of savvy investors, and our research shows the vast majority of middle aged and retirement aged people do not understand even basic financial terms. This is unlikely to change as very few people are even willing to spend a few pounds on an investing guide - under 4 per cent according to our research, compared to 24 per cent who would primarily use the internet to for free advice.'

In response to these fears, George Osborne did confirm that there would be a consultation on how to create a secondary annuities market.

Binyamin Ali is assistant editor of Private Client Adviser