Ministers back down over cap on pensions

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The Government finally caved in to pressure from the insurance industry over the design of its new national pension savings scheme yesterday, revealing that it will only allow savers to invest up to £3,600 a year in the new personal accounts when they are launched in 2012.

Publishing its response to the White Paper on personal accounts, which came out last year, the Government revealed it had decided to back down from original plans to cap annual contributions into the national scheme at £5,000.

Instead, the Pensions minister James Purnell said the Government had opted for a limit of £3,600 to ensure personal accounts "complements rather than competes with existing high quality pension provision".

The Association of British Insurers vigorously opposed the original proposals to set the cap at £5,000, concerned that it would eat into the industry's core market, calling for a much lower limit of £3,000. However, director general Stephen Haddrill said he was happy with the new cap, which would "help to ensure that the new pension system is focused on its target market of low to middle earners".

But he added a word of caution: "There is a lot more work to be done over the coming months and years to ensure that personal accounts and the existing pensions market complement each other. In particular, decisions will need to be taken to determine how auto-enrolment will work for existing pension schemes."

Consumer groups, who had lobbied for a higher cap, were generally supportive of the Government's announcement yesterday. However, the Liberal Democrats said that the move put "the interests of savers behind those of pension providers".

David Laws, the Liberal Democrats' work and pensions spokesman, said: "While it is vital that personal accounts do not undermine good quality occupational or private pensions, it is also essential that people who use personal accounts are able to save enough to secure a decent income in retirement.

"The cap on contributions must be set at a level which allows people to save up to two-thirds of their income - the level that people say they want."

The new system of personal accounts will force employers to contribute a minimum of 3 per cent to their staff's pensions, and will automatically enrol employees into the company scheme.