Government plans to introduce a single lifetime limit on pensions savings could not encourage people to save more for retirement, according to an accountancy group.

The Government proposes replacing the eight different tax regimes that govern pensions with a single set of rules and a lifetime pensions saving limit of £1.4 million that can benefit from tax relief.

It said the move would mean more than 99 per cent of people would be able to save more into a pension.

But the Institute of Chartered Accounts in England & Wales warned if this limit was increased in line with the Retail Price Index (RPI), as the Government is proposing, in time it could act as a disincentive to save for a growing number of people.

Because earnings were likely to increase faster than the RPI for the foreseeable future, the limit would not keep pace with earnings growth.

If prices continued to rise at the recent rate of two per cent a year and earnings increased by four per cent a year, after 20 years earnings would have risen by 120 per cent but prices by only 49 per cent.

This will mean the limit could have been reduced by about 33 per cent in real terms, meaning the current limit of £1.4 million could be worth only about £940,000 in 20 years' time.

Ian Young, technical manager at the institute's tax faculty, said: "While stocks will in due course recover, demographic change combined with low long-term annuity rates will result in significant underfunding for retirement provision."

The Association of British Insurers welcomed the proposals but also called for a number of modifications to be made to the limit, including indexing it in line with earnings rather than prices.

Director general Mary Francis said: "The benefits of the new, simpler lifetime limit will easily be lost if it starts off on the wrong foot."

Friday April 11 2003