George Osborne has revealed that he will review the higher earners’ pension tax regime and look to replace it with a reduced Annual Allowance limit, which would still aim to raise the same overall tax yield of around £3.5bn.

The Chancellor’s decision to simplify tax on pensions, made as part of the 2010 Emergency Budget, has been met with praise by the industry.

Friends Provident said the move was “encouraging for future pension policy in the UK”, and said the huge savings target of £3.5bn would be best achieved with a new annual savings limit of between £40,000 and £45,000.

“Today’s commitment to look at replacing the previous government’s complex proposals with an elegant solution that achieves the same revenue objective is a move in the right direction,” said Trevor Matthews, chief executive officer for the insurer. “It is a welcome first step that begins to remove the uncertainty that has been lingering over pension planning in the UK for some time.”

Steve Latto, head of pensions at Alliance Trust Savings, added that the promise could make pensions more attractive for savers: “The pensions industry and advisers will be breathing a huge sigh of relief that there will no longer be a need to get their heads round complex rules on pensions tax relief for high earners. The change ensures that pensions remain attractive for individuals across all income brackets.”

The Chancellor also announced that the state pension will be linked to earnings, a U-turn on rules implemented by the former government. He said the state pension will be “triple locked” alongside rises in earnings, in prices, or a rise of 2.5 per cent, whichever is greatest from 2011.

“There will be no more 75p increases in the state pension,” he said. “We will provide lasting help to pensioners. The last government broke the link between earnings and the state pension, forcing more and more people into means testing.”

And Osborne pledged, a day after it was announced that John Hutton would chair the new Pensions Commission, that the “spiralling” cost of public sector pensions would be addressed. He said it would cost £10bn per year until financial year 2015/16 in support for public sector pensions if something is not done.

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