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DWP listens to pleas and cuts cap to £3,600

‘The Government has struck a good compromise’

The Department for Work and Pensions has responded to lobbying from the industry and has reduced the maximum contribution cap on pension personal accounts from £5,000 to £3,600.

Its response to the White Paper consultation, published last week, reveals that the contribution cap will be set at £3,600 in 2005 earnings’ terms and will be rated upward year on year.

The move demonstrates that the Government has listened to the industry and the Conservatives who pressed for a reduction to stop the scheme damaging existing saving.

But consumer champion Which? and various employer organisations are likely to be be disappointed as they were pushing for at least a £5,000 cap.

The £3,600 cap is likely to have risen to around £4,700 by 2012, assuming earnings continue to increase at their current rate of 4.5 per cent.

The DWP has also said that it will review the £10,000 year one contribution level.

Association of British Insurers director general Stephen Haddrill says: “The Government has responded to the concerns that we had about its earlier proposals. It has taken the right decision in setting the contribution cap for personal accounts at £3,600. This will help to ensure that the new pension system is focused on its target market of low to middle-earners.” Scottish Widows head of pensions market development Ian Naismith says the maximum annual contribution is a key element of the targeting.

He says: “We would have preferred the £3,000 limit originally proposed by the Pensions Commission but the Government appears to have struck a good compromise with its new proposals.”

Investment Management Association chief executive Richard Saunders says: “The reduction in the cap from the previously proposed £5,000 is a wise decision. It will help to focus the scheme on the target market and protect it against unfounded charges of misselling.”

The National Association of Pension Funds chief executive Joanne Segars says the £3,600 ceiling is a “sensible compromise”.

She says: “The ceiling of £3,600 will allow people to pay additional amounts to personal accounts whilst ensuring that personal accounts remain a targeted intervention, so keeping levelling-down to a minimum.”

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