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Contribution cap set for NPSS

UK - A maximum of £3,600 (€5,331) can be contributed by to the UK's National Pension Savings Scheme (NPSS) bu an individual annually once launched in 2012, the government has announced today.

The lowering of the cap under the originally proposed £5,000 was welcomed by the National Association of Pension Funds (NAPF) and other players in the pensions industry.

"Today's announcement shows that the government has listened to the workplace pensions industry," NAPF chief executive Joanne Segars said. "A contribution ceiling of £3,600 is a sensible compromise."

"Industry support and cooperation will be vital in getting the scheme off the ground, and this demonstration of how the industry's views have been taken on board, will certainly win the government brownie points," Paul McGlone, head of employer advice at Aon Consulting, also commented.

One argument from the UK pensions industry against a higher cap was it might lead to people withdrawing money from second pillar pension funds.

Possible negative effects of the NPSS on existing pension arrangement were the major concern in first reactions to the government's earlier proposals.

The NAPF welcomed news stating "employers offering qualifying schemes with higher levels of contribution or benefits will be able to enjoy a three-month waiting period before they are required to automatically enrol their workers," as set out in the government paper.

Furthermore, compulsory employer contributions will be phased in to help companies cope with the costs of auto-enrolment. Employers will pay 1% in year one, 2% in year two and the full 3% after that.

Nevertheless, Stephen Haddrill, director general at the Association of British Insurers (ABI), said further decisions will need to be taken to determine how auto-enrolment will work for existing pension schemes.

He hailed the government's promise not to subsidise the creation and cost
of Personal Accounts with money from the taxpayers. The government noted it will "continue to develop the  funding strategy further over the coming months".

The government has also confirmed the NPSS will be managed by a board of trustees which, in turn, will be advised by a members' panel and an employers' panel.

Punter Southall warned, howver, the contribution cap was one of the less significant issues regarding the NPSS.

The actuaries pointed out current rules on trivial commutations will have to be revised. Small pots of pension money cannot currently be commuted where the the member has total benefits in excess of 1% of the lifetime allowance (£16,000 at present).

"This means that individuals with small personal accounts will have to purchase annuities on uneconomic terms," Punter Southall pointed out.

Another issue it raises is the problem of auto-enrolment where there is no individual financial advice.

"It has still not been proved that generic advice will do enough to prevent individuals from making ineffective contributions to personal accounts, with no prospect of improving their income in retirement," said Geoff Tresman, principal of Punter Southall Financial Management.

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