Big earners lose battle, but not yet the war, over lifetime pensions limit

Britain's highest-paid executives failed yesterday to save their multi-million pound pension pots from the Inland Revenue after the Chancellor stuck to plans to impose heavy taxes on savings of more than £1.4m.

Since the proposal was floated last December, captains of industry have been fighting to raise the "lifetime limit" on the amount of money they can have in their pension fund by the time they retire.

Although the Chancellor said yesterday £1.4m was the correct figure, he ducked from making it a firm proposal and said the National Audit Office would conduct a final review.

A Treasury report on simplifying pension rules said that only 5,000 people would currently be caught by the £1.4m limit, and a further 1,000 people a year during the next 10 years. Mercer, the pension consultants, estimates up to 600,000 people would be affected.

David Yeandle of the engineering body the EEF said: "I am surprised and disappointed that the Chancellor did not take this opportunity to make definite proposals on the lifetime limit. A year on and we are still in a period of uncertainty."

The £1.4m limit was calculated using the size of pension fund needed to produce a retirement income of £66,000. But the pensions industry said, on current annuity rates, a pot of £1.8m to £2m is needed to buy an income in retirement of £66,000. They want the limit to be linked to earnings, not prices, as the Government set out yesterday.

Adrian Douglas, at the accountancy firm Moore Stephens, said: "The £1.4m limit is too low. The knock-on effect for employers may be that they will have to look to providing alternative employee benefits for their top executives."

But Mr Brown has given some concessions to those who end up with more than £1.4m in their pension fund. Under the Government's original plans, any savings above that level at the time of retirement would be taxed at 60 per cent. This has now been reduced to 55 per cent. And high earners, such as Sir John Bond of HSBC and Niall Fitzgerald at Unilever, who already have far in excess of £1.4m in their pension, will have their funds ring-fenced and will not be caught out by the limit.

The lifetime limit is part of a wider package to sweep away the complex web of pensions legislation. Under the Government proposals, eight sets of pension rules will be reduced to one.

There is good news in the proposals for all pension savers. Anyone will be able to join any type and any number of pension schemes at any time. The numerous rules governing how much tax-free cash can be taken pension funds on retirement will, under yesterday's proposals, become a simple 25 per cent limit for everyone.

Greater flexibility for receiving income in retirement was also set out yesterday. At present, all savers must buy an annuity - a guaranteed income for life - at the age of 75. The Government said it would allow the option of keeping pension funds invested beyond that age.

The Government also confirmed earlier proposals to end the 'cliff-edge' between working life and retirement. It will allow savers to draw on their pension and carry on working part-time.

In another move to boost flexibility, residential property was opened up yesterday as a potential investment for pension funds.