Legal & General believes that only a lifetime limit on contributions will encourage the 'correct' pension savings behaviour of starting pension contributions early.

In contrast, the proposed lifetime limit of £1.4 million on an individual's pension fund could stifle pension investment, as investors juggle their financial affairs to avoid the severe tax penalties that will be imposed by the Revenue for going over the limit.

This would equate to a 60% marginal tax rate, a rate not seen in this country for over a decade.

Adrian Boulding, Pensions Strategy Director at Legal & General said:

"Just compare the two regimes. The proposed lifetime limit on funds will encourage people to delay saving, for fear of over-hitting the limit. It will also distort investment choice away from equities, as the taxman would reap a share of a market recovery.”

"In contrast, a lifetime limit on contributions will encourage early investment, to gain the maximum interest growth on allowable contributions. With a proper risk/reward balance, this will encourage long term equity investment."

Legal & General believes that it is important for people to start saving as much as they can afford for their retirement, as early as possible. For example, to achieve an annual income of 50% of current average earnings in real terms, currently £25,044, at retirement aged 65:

• A male aged 25 will need to contribute £363 gross per month.
• A male aged 30 will need to contribute £415 gross per month.
• A male aged 35 will need to contribute £482 gross per month

"Currently the level of pension contributions made in the UK are well below the amounts that should be made to achieve a realistic pension income in retirement. In turn, the contribution levels needed to meet the proposed lifetime limit are well in excess of the current average contributions,” Adrian warns.

“However, if the government are successful in stimulating more realistic levels of pension contributions, then high stockmarket returns could result in many people being caught by the limit in the future.”

“For example, Legal & General believes that many accountants, surgeons and head teachers will go over the limit in years to come. Only the introduction of a limit on contributions will provide 'true' peace of mind to the majority of savers."

Legal & General's calculator on www.legalandgeneral.com/pensionscalculator can help to demonstrate just how much an individual is able to save per month to fund for their income in retirement.