The annual allowance for tax privileged pensions will be cut from £255,000 to £50,000 from April next year, the Treasury announced this morning.
Financial secretary to the Treasury, Mark Hoban, also said the lifetime allowance would be reduced from £1.8m to £1.5m from April 2012.
The government estimates an annual allowance of £50,000 will affect 100,000 pension savers - 80% of those will have incomes over £100,000.
Any unused annual allowance in one tax year can be carried forward to the following three tax years.
To protect individuals who exceed the annual allowance due to one-off "spike" in accrual, the Government will allow individuals to offset this against unused allowance from previous years.
Tax relief will be given at people's highest marginal rate, for example a 50% taxpayer will get 50% tax relief.
In addition, people in defined benefit (DB) schemes will value the increase in their benefits using a factor of 16, significantly above the current factor of 10.
Standard Life says, as a result, some DB members will face tax charges, especially higher earners and those who get significant salary increases.
However, there will also be a three year smoothing mechanism to allow staff to 'average out' any significant pay rises.
The rules will replace the complex legislation proposed by the last Government in the Finance Act 2010.
This measure will raise £4bn per annum in steady state and will help reduce the Budget deficit.
The government will also consult on options enabling people to meet tax charges out of their pensions in November.
Mark Hoban said: "We have abandoned the previous Government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision."
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First mentioned in Cridland Report