There was speculation before the announcement that Mr Osborne could make the move and he has now confirmed the proposal to the House of Commons.
He said that fewer than 4% of pension savers currently approaching retirement will be affected.
Mr Osborne said this move will save around £600m a year and from 2018 the Government would index the lifetime allowance.
He said: "I want to ensure those still building up their pension pots are protected from inflation, so from 2018 we will index the Lifetime Allowance."
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The founder and chief executive of deVere Group, Nigel Green, said: "Another reduction in the lifetime allowance is scandalously counter-productive.
"This pre-election gimmick is a disincentive to save as much as possible for retirement– and therefore it could be harmful to Britain's long-term economic success.
"With the burgeoning pensions crisis and the looming care crisis, amongst many other factors, we need to urgently revitalise, promote and nurture a savings culture in the UK as a matter of priority. Continually cutting the LTA goes against this concept.
"This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives, in order to be able to enjoy their desired retirement. It is a nothing short of a dangerous cap on aspiration."