In his Budget speech yesterday the Chancellor announced significant new disincentives for the top 1.5% of pension savers to continue.

From 6 April 2010, first of all a new 50% tax rate will apply to taxable income over £150,000 (in the PBR last November it was going to be 45% from 2011/12). In addition, the basic personal allowance for income tax will be gradually reduced to nil for individuals with "adjusted net income" above £100,000. A taper will apply, reducing the allowance by £1 for every £2 above the income limit. (The original PBR plan was to halve it for people earning over £100,000 pa and eliminate it for those on over £140,000.)

However, it was the Chancellor's next announcement that generated most headlines from the pensions industry:

"from April 2011, I will restrict pension tax relief for those with incomes over £150,000 so it is gradually tapered to the same 20% rate the majority of people receive. We will consult on implementation. I am introducing measures from today to prevent forestalling. Again only affecting those with incomes over £150,000.

Supporting guidance explained that the taper will end at £180,000, ie those earning over £180,000 will only be entitled to 20% relief on pension contributions.

The Budget contains substantial spending commitments to create jobs, but there will be no Government funding for the job of explaining the convoluted "anti-forestalling" measures which have been introduced immediately (ie from 22 April 2009) to restrict higher rate tax relief on pension contributions. To address the anticipated risk that high earners might seek to suddenly pay very large pension contributions in the next two years to obtain higher rate relief while it still lasts, new restrictions will apply to people

• whose income is £150,000 or higher
• who change their normal ongoing regular pension savings, and
• whose total (new) pension savings exceed £20,000.

As usual with these sledgehammers (remember recycling?), the vast majority of pension scheme members are unaffected by the proposed changes. Of those with income of £150,000 or more, only those who increase their pension savings may be affected, and even then, only if their overall annual pension savings are £20,000 or more, and if they make changes to their normal pattern of pensions savings or to the way in which pensions benefits accrue. In certain circumstances, those who join new or reconstructed occupational schemes or GPPs will be able to escape the £20,000 limit.

The £20,000 Special Annual Allowance sets an upper limit on the amount of additional pension savings for which full tax relief at the higher rates of tax (40% for the tax year 2009/10, 50% for the tax year 2010/11) can be given. Tax relief on additional pension savings above the amount of this allowance will be at the basic rate of tax only. The special annual allowance tax charge which restricts relief on additional contributions to basic rate is a charge on the individual, collected via their Self Assessment tax return. The rate of charge is the difference between the highest rate of income tax and basic rate (20% for 2009/10).

How it will be decided whether pension contributions are 'new' and how additional pension savings are to be measured against the Special Annual Allowance, especially since employer contributions - including salary sacrifice arrangements - are to be counted, is complification at its best. The new rules are set out in 52 pages of draft guidance for the industry and another 31 pages of draft legislation and notes headed 'Special Annual Allowance Charge'. Several other new terms, such as 'Protected Pension Input' (basically, any continuation of pre-22.4.09 pension contributions) are introduced. Consultation is promised, eg on how employer contributions to DB schemes should be valued.

Other measures affecting pensions

Pensioners have been disproportionately badly affected by the economic crisis and very low interest rates. The Government has reaffirmed that the basic state pension will continue to be increased by at least 2.5%, so if RPI inflation this September is below zero, as is expected, basic state pensions will rise in real terms. In another gesture to pensioners, the capital disregard on Pension Credit, which has been at £6,000 or below for over a decade, is to be raised to £10,000 from November 2009. However, the outrageous 10.4% rate of "deemed income" from savings above this limit remains.

Under other provisions to be included in the forthcoming Finance Bill, compensation payments made by the FAS, including lump sums, are to be treated in broadly the same favourable way as if paid from a registered pension scheme (BN48).