A cap of £3,600 is to be placed on annual contributions to personal accounts in the National Pension Saving Scheme (NPSS) when it comes into operation in 2012, it was announced today.

The figure is significantly lower than earlier Government proposals of £5,000 – backed by Which? and the Trades Union Congress – but in line with calls from the pensions industry, which feared that the scheme could compete with existing products.

In a response to the Pensions White Paper published in April, Which? stated that a cap below £5,000 "would risk placing a cap on people's aspirations for a comfortable retirement."

Today, David Laws, the Liberal Democrat Shadow Work and Pensions Secretary, said: “This Government U-turn risks putting the interests of savers behind those of pension providers.

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“While it is vital that Personal Accounts do not undermine good quality occupational or private pensions, it is also essential that people who use Personal Accounts are able to save enough to secure a decent income in retirement."

But James Purnell, the pensions reform minister, said that the level would allow workers on average incomes to save enough to guarantee a retirement income of two-thirds of their salaries.

And John Cridland, deputy director-general of the CBI said: "The cap on personal accounts contributions strikes a sensible balance between ensuring the less well off can contribute sufficiently to a scheme without undermining the personal pensions market. We hope these measures will provide the foundation a national consensus on tackling the long-term pensions needs of the UK."

The scheme is part of the Government’s reforms designed to encourage people to save more for their old age, in order to prepare for predicted demographic changes which will see Britain’s population become older over the coming decades.

Workers will be automatically enrolled into the scheme, but will have the right to opt out. Their contributions will be matched by payments from employers.

Mr Purnell told BBC Radio 4’s Today programme: “Within the cap we will be announcing, which will be a little bit higher than £3,000, a median earner would be able to get to two-thirds of their income in retirement, which is the gold standard which people recommend.

“It will be very easy for virtually everyone in this target group to get to that level.

“The issue is not going to be people who won’t be able to contribute enough.

“The key thing is to persuade people to save for a pension, because today millions of people aren’t doing so.

“We think what we are doing today strikes the right balance in targeting it and making sure people can make enough contribution.”

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