The Low Incomes Tax Reform Group (LITRG) is concerned that a measure designed to restrict tax relief for wealthier pension contributors will have an undesirable side effect on low-income pensioners.

The Government has confirmed that the lifetime allowance, the maximum an individual can save in a registered pension scheme while claiming tax relief, is to be frozen at £1.8 million for five years up to and including 2015/16.

This will adversely affect pensioners between 60 and 75 who wish to convert their small pension rights into a cash sum, and can do so provided that their total pension savings do not exceed the ‘trivial commutation' limit of £18,000.

This limit is pegged to 1 per cent of the lifetime allowance - i.e. £18,000. Thus, freezing the lifetime limit will also erode this valuable facility for low-income pensioners to commute their savings into cash.

Robin Williamson, technical director of LITRG, said, ‘We are calling on the Government to de-couple the trivial commutation limit from the lifetime allowance and to raise it in line with inflation, so that those with very small pension pots are not put into a worse situation.’