George Osborne will cut the lifetime limit on the amount you can have in a pension from £1.25 million to £1 million in April. This doesn't sound like anything to frighten the horses: you could be forgiven for thinking that the only people to be able to afford to save this much are the incredibly wealthy. But you'd be wrong. This change will rock the pension plans of a large swathe of ordinary middle class savers.
Under the new rules, if the amount in your pension breaches £1 million, anything over that amount will be subject to a punishing 55% tax. Tweaking the lifetime limit has been seen as an easy tax grab for the Chancellor, who has been gradually eroding it since 2010 - from £1.5 million. He has reasoned that it will net him billions of pounds and only hit the wealthy, so it won't cause him any great damage in the polls.
The latest change, to £1 million, was announced last year. At the time Osborne assuaged our fears by saying that only 55,000 of the wealthiest savers would be affected. The Treasury continues to insist that only 4% of the wealthiest will be affected. It highlights that the average pension pot for people approaching retirement is £85,000.
It quoted the example of a 30-something saver who had worked hard to save £66,000 in their pension, and contributed £6,750 a year to the pot. They would breach the limit by retirement age. Middle managers who don't consider themselves among the ranks of the wealthy could easily be drawn into paying tax at 55%.
There are also public sector workers, for whom more of their pay-packet is weighted towards retirement benefits. It means senior nurses and teachers could end up with pots bigger than £1 million.
Andy James, head of retirement planning, Towry, warns: "A million sounds a lot, but when you look to turn that into an income over a retirement that could last 20, 30 or even 40 plus years it doesn't necessarily go that far, particularly when you are used to higher levels of spending."
Andrew Tully, pensions technical director, Retirement Advantage, adds: "The 'new' limit of £1m might seem like a huge sum of money, which it is, but keep in mind that size pot would currently secure a lifetime income of around £30,000 a year, which is clearly not a king's ransom. It also effectively penalises people who have enjoyed good investment growth over many years."
Although the limit will rise with inflation from 2018, it is highly unlikely to keep pace with wage inflation, so as time goes on, more and more will be dragged into the net. The auto-enrolment system automatically pulls young people into pensions, in a way that will transform their retirement prospects. However, if they go onto a reasonably well-paid career, and save carefully though out, they are highly likely to breach the cap.
What can you do?
There is still time to 'protect' pension benefits of over £1 million before April, but it's important to take advice, so you understand the options and the restrictions you will face when you have protected your pension pot.
If you are concerned that you may breach the limit at a later date, it's a case of keeping an eye on your pension on a regular basis - so you can stop contributions or draw your pension early if there's a risk of breaching the limit.
Because while most people can't ever imagine saving £1 million for their pension, more than a million people may well end up doing so.