The response reveals the contribution cap will be set at 3,600, in 2005 earnings terms, and will be uprated year on year.
The move shows the Government has listened to the industry and the Conservatives who pressed for a reduction to stop the scheme damaging existing saving.
But Which? and various employer organisations will be disappointed at the news as they were pushing for at least a 5,000 cap.
The DWP has also announced that it will review the 10,000 year one contribution level.
The response pledges there will be no tax payer subsidisation of personal accounts, although initial advisory costs will be borne by the tax payer.
Set up and operational costs will be borne by personal account holders through charges which the Delivery Authority will set.
Standard Life head of pensions policy John Lawson says: Regarding the short term costs being borne by the tax-payer, I think that we want to see an explicit inventory of all costs and which ones have been allocated to policy development etc. Only that way can we be sure that we are competing on a level playing field.”
ABI director general Stephen Haddrill says: The Government has responded to the concerns 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: “It is essential that Personal Accounts are focused on the target market of those who currently have no pension provision.
“If they are largely used by employers with existing good provision it could be detrimental to staff because many employers might well level down contributions to the minimum 3 per cent.
“The maximum yearly contribution is a key element of the targeting, and while we would have preferred the 3,000 limit originally proposed by the Pensions Commission the Government appears to have struck a good compromise with its new proposals.”