The amount of pension savings on which people receive a tax break is to be slashed to less than a fifth of its current level to save £4 billion a year, the Treasury announced today.
The tax-free amount is being cut from £255,000 a year to just £50,000 from April next year (see the Pensions guide guide).
It is estimated the changes could hit over 100,000 people.
The Government also plans to reduce the lifetime pensions savings allowance from £1.8 million to £1.5 million from April 2012. This is the amount you can accumulate free of tax in all your pension funds when you come to draw your benefits.
The previous Government had planned to restrict tax relief for those who earn over £150,000 a year, but this proposal has now been altered.
Tom McPhail, from financial advisor firm Hargreaves lansdown, says: "This news is as good as can be expected and is a vast improvement on the tortuous system for restricting tax relief proposed by the previous Government.
"It is clear from these reforms that everyone should now look on their pension allowance like their Isa allowance, as something to be used every year."
Financial Secretary to the Treasury Mark Hoban says: "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."
Further reading/Key links
Boost income: Benefits, Pension Credit, State Pension Boosting
More on pensions: Pensions guide, Free, printed annuity guide