Chancellor George Osborne has delivered a £1 billion Budget tax hit to pensioners as he cut the top rate of tax for Britain's wealthiest earners.
The Treasury acknowledged that 4.5 million pensioners would lose out as a result of the decision to phase out their additional age-related allowances.
Age UK said it was "disappointed" with the move warning that it could leave some pensioners up to £259-a-year worse off, with little chance to change their retirement plan.
However, Treasury sources pointed to a report by the Office for Tax Simplification which claimed many pensioners did not understand the allowances and found claiming them "burdensome".
Mr Osborne presented his statement as a Budget that "supports working families" - lifting another 840,000 of the low paid out of taxation as he raised the income tax threshold to £9,205.
His widely expected cut in the top rate of income tax for earners on over £150,000 from 50p to 45p was offset by a hike in stamp duty on properties worth over £2 million and a commitment to clampdown on "aggressive" tax avoidance. However, it threatened to be overshadowed by the row over the phasing out of age-related allowances.
Under the Chancellor's plans allowances will be withdrawn for new pensioners from April next year while existing pensioners will have their allowances frozen at £10,500 for the over 60s and £10,660 for the over 75s until overall tax thresholds catch up with them.
According to the Budget red book, the measure will raise an additional £1.01 billion for the Exchequer by 2015-16.
Although Mr Osborne insisted there would be no cash loss to pensioners, Treasury sources said existing pensioners would be, on average, £63 a year worse off while new pensioners would lose out to the tune of £197 a year on average.
Mr Osborne said of the allowances: "The National Audit Office points out that many pensioners don't understand them. These allowances require around 150,000 pensioners to fill in self-assessment forms, and as we have real increases in the personal allowances, their value is being eroded all the time."