MONEY COMMENT
Pension Cap Plans Put On Hold

By Jane Mack (TMFJane)
December 15, 2003

About a year ago the government announced plans to put a £1.4 million cap on all pension funds saying the limit would affect only a small number of Britain's wealthy.

Considering the average value of a pension fund on retirement is about £40,000, you'd think that being able to save as much as £1.4 million in a pension fund would give most people plenty of leeway and, in truth, it probably does.

Nevertheless, the proposals caused an outcry from pension experts who claimed that they would affect many more than the 5,000 people estimated by the government and that it would penalise people who saved conscientiously for their retirement. Not only were they against the cap on funds but they also thought that punishing those who's saved more than that by taxing the surplus at 60% was a bit steep.

Given the wide range in the estimates of the number of people who would be affected by this move, the Chancellor is now re-examining the issue although he announced last week that he still plans to introduce the £1.4 million cap in 2005. But he's asked the National Audit Office to look over his proposals and has said he will consider taxing the surplus at a reduced 55% as well as allowing it to be taken as a lump sum on retirement.

As I said above, the proposals may only affect the very wealthy but if you start paying into a pension fund at a young age, your funds will have longer to grow and to reach the lifetime cap – particularly as the Chancellor plans to change the age at which you can start claiming your pension from 50 to 55. On top of that, there is no guarantee that, in future years, the £1.4m limit will be adjusted upwards. So each year, more and more people could be caught in its clutches.

Find out more about Pensions.