The UK government is to slash the lifetime allowance limit for tax-free pension savings to £1m ($1.4m) from 2016, Chancellor George Osborne has announced.

He revealed the £250,000 reduction would pay for a cut in tuition fees to £6,000 a year and would save the Treasury around £600m per annum.

"We have already taken steps to curb the size of the very largest pension pots. But the gross cost of tax relief has continued to rise through this parliament, up almost £4bn – that's not sustainable," Osborne said.

"So from next year we will further reduce the lifetime allowance from £1.25m to £1m. This will save around £600m a year. Fewer than 4% of current pension savers will be effected. However, I want to ensure that those who are building up their pension pots are protected from inflation. So from 2018 we will index the lifetime allowance.

Successive governments have cut the relief since it was introduced under Labour in 2006.

Osborne reduced the limit from £1.5m to £1.25m in April 2014 and the move means savings of up to £40,000 a year qualify for the relief, subject to the value of the retirement pot to be sheltered over the workers' lifetime of £1.25m. If savers went over this limit, they would have been hit with a 55% tax charge.

The government's czar for older workers, Ros Altman, hit out at Osborne on Twitter and claimed the move was "draconian".

She said: "Such a shame that lifetime limit is being cut. It was £1.5m last year and slashed to £1m next year – draconian. Hits pension planning."

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