The recent publication of the draft legislation of the Finance Bill 2011 followed an announcement in June of significant changes to the way in which pension schemes are operated.

The most important changes are in the Annual Allowance (AA) and the Lifetime Allowance (LTA) and these have been trailed over the past few weeks.

However, changes involving the removal of the “requirement to annuitise by age 75” were subject to consultation and have just been announced for the first time.

Hot on the heels of July's announcement of the end of compulsory annuitisation at age 75 comes another major change to pension regulation.

The Treasury announced yesterday it is to cut the annual allowance for pension saving from £255,000 to £50,000 from next April.

The change will affect 100,000 pension savers, 80 per cent of which have incomes above £100,000, according to the Treasury. Pension savings above this level will be subject to a 55 per cent tax charge. Individuals paying 50 per cent tax will be able to claim relief at the full marginal rate.

Individuals will be able to offset unused parts of the allowance over a three year period to allow for one-off spikes in contributions over the £50,000 limit.

The lifetime allowance will be cut from £1.8m to £1.5m in April 2012. The Treasury will consult later this year about measures to help those who are close to and may breach the new limit.

For defined benefit schemes, increases in benefits will be valued at a factor of 16 compared to the current factor of 10. The increase is less than many had expected.

The new structure was put to consultation in July following widespread criticism of the previous administration’s proposal, the High Income Tax Relief Charge, which involved an earnings test, an age-related method of valuing final salary and other defined benefit pensions, and a complex tapering of tax relief for earnings between £150,000 and £180,000.

The changes will not affect the vast majority of savers. A financial planning rule of thumb is to save 12% of income per annum to ensure lifetime financial security. With the ISA allowance of £10,200 per annum and a pension allowance of £50,000 per annum, an individual would have to be earning in excess of £500,000 pa before he or she would be unable to direct all savings into these two tax-privileged savings vehicles.

The reduction in the lifetime allowance is something that needs to be monitored closely, especially for those approaching this figure, or indeed already in excess of £1.5 million.

One moor esteem on the agenda for the next round of annual reviews!