Pension cap raised

The government has raised the lifetime limit on individual pension funds from 1.5 million to 2.5 million.

16:10 17 June 2004

The government has raised the lifetime limit on individual pension funds from 1.5 million to 2.5 million by virtue of a clause buried in the Finance Bill, set for implementation in 2006.

From April 2006, people saving up pension funds over the lifetime limit will be taxed at an effective rate of 55 per cent on income from the part of the fund exceeding the cap.

Following fierce criticism over the 1.5 million limit, the government has decided to help those who save in money purchase pensions, such as personal pensions or defined contribution occupational pensions, by softening the rules, The Daily Telegraph newspaper reports.

The government said the decision was prompted by the difference in the treatment of money purchase funds and defined benefit occupational schemes - often called final salary pensions.

The latter are valued in terms of the pension they pay out, rather than in terms of fund size. To get around this, the government will assume a 20-to-1 ratio to determine the notional size of a final salary pension fund when a worker retires.

A spokesman for the Treasury said: "This is not a reverse of the 1.5 million cap; it has been possible to buy scheme pensions from insurers for some time.

"During consultation, it was decided to test the value of an annuity against the lifetime cap when it is purchased."

However, Tom McPhail, pensions expert at independent financial adviser Hargreaves Lansdown, said the Government was trying to "shoehorn reality to fit the facts".

"Its argument that 1.5 million produces 75,000 per year using the 20-to-1 ratio is meaningless if annuity rates do not reflect it, which they do not, so they have had to change it," he added.

The lifetime limit is being introduced as part of the Government's simplification of the pensions regime in 2006.