THE pre-budget small print had a timebomb for pension savers - a £400m-a-year stealth tax on middle-class retirement funds hidden in the proposals.

This will be clawed back from the pension system by bringing forward the date for key changes to the state second pension (S2P), a top-up to the basic state pension.

Paul Garwood at Smith & Williamson, an accountant, said: “This is another attempt by the government to restrict amounts paid out to pensioners, whilst the politicians’ pensions remain gold-plated.”

About 20m people pay into S2P, formerly known as Serps. At present the amount you receive from the top-up pension is linked to earnings and the number of years you have worked. The more you have earned the more you receive, up to a limit.

The government is planning to freeze the upper limit in 2009, meaning that an increasing number of people will pay national insurance contributions (Nics) for which they will receive no pension benefit in return.

By the government’s own estimates, this will cost pension savers £290m in 2009 and £440m in 2010. Originally it wasn’t intended to introduce the cap until 2012 at the earliest, and possibly as late as 2015.

By 2030, the plan is that everyone will receive the same amount from S2P. Middle to high earners could be more than £1,000 a year worse off as a result, according to insurer Standard Life.

John Lawson at Standard Life said: “Many people will see the amount of S2P they receive fall in value without enjoying an equivalent reduction in Nics. The value of the benefits will be eroded slowly from 2009 but by our estimates it could leave higher earners £1,300 a year worse off.”

Someone with a full employment record earning about £35,000 or more can currently earn a state second pension of up to about £6,000 a year. Standard Life estimates that the cap on the earnings limit will reduce this to a pension worth only £4,700 in real terms by 2030.

The government’s cash curb on S2P has been introduced as a way to fulfil its pledge of reintroducing the link between the state pension and earnings, which was severed by Margaret Thatcher in 1980.

The state pension currently rises in line with inflation. Because incomes usually rise faster than prices, this means it will become more generous in future.

The government estimates that by 2050 its plans will result in a total state pension at retirement, including the S2P, of nearly £135 a week in today’s terms. If it were to remain linked to prices, it would be worth between £90 to £100 a week.

Age Concern said it was disappointed the government had not brought forward the date for relinking the state pension to earnings, as it has the S2P cap. The government hopes to introduce the link to earnings by 2012, but the date may be pushed back, to 2015 at the latest.

FORCED INTO BUYING ANNUITY

Keith Glass, 64, is one of the lucky ones about to reach state retirement age who won’t be hit by the downgrading of the state second pension. But the prebudget report wasn’t all positive for the retired financial adviser from Tyne & Wear, pictured with his wife Sheila, 68. He avoided buying an annuity when he retired three years ago by moving his pension into a drawdown scheme. However, he feels he may now be forced to take one out in the future. It is no longer necessary to buy an annuity at 75 but the government has made the alternatives so unattractive that it hopes no one will want them. The prebudget saw onerous tax charges introduced on a type of scheme that had been used to dodge buying an annuity. Glass said: “I don’t want to tie my money up in an annuity because it means I lose all flexibility over how my retirement funds are used.”

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