About 100,000 savers will be hit by the government’s stealth raid on pensions, expected to net it £400m a year in tax revenue by 2011

Chancellor Alistair Darling froze the lifetime allowance for pensions at £1.8m for five years from April 2011, and the annual limit at £255,000 in his pre-budget report last week.

More than 100,000 people are likely to breach that lifetime allowance by 2025, 35,000 of them by 2016, Standard Life said, as their pensions grow faster than the limit. Above the threshold, you pay a punitive tax of 55%.

The government expects to make around £750m more in tax revenue in the four years to April 2012 and £400m alone in the first year of the new rules.

Karen Goldschmidt at the Association of Consulting Actuaries said the freeze would be an “immediate disincentive to making pension savings”.

Someone with a £1.8m pot just before the start of the new tax year in 2011 could retire with no tax penalty, but if their fund grew by 5% a year to £2.3m in 2016, they would be hit with 55% tax on £500,000 (the amount over £1.8m).

Anyone with a pension fund of £1.2m or more today, who achieves reasonable growth of 6%, will face the penal charge on some of their fund by 2016, Rowanmoor Pensions said.

Those with small pension pots will be affected too: anyone with retirement savings of less than 1% of the lifetime allowance can cash it in rather than draw income — and the frozen allowance will mean this is limited to pensions of just £18,000 or less.

However, you can avoid the retrospective tax grab. We look at how:

Apply for protection

People with large pension funds have until April 5 to apply for protection against exceeding the lifetime allowance. Anyone who had a pension fund of £1.5m or more when the new rules came in on A-Day at the start of the 2006-7 tax year should apply for primary protection.

Future contributions can be made, and any growth on the fund up to the increase in the allowance is protected from tax charges.

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