A CAP of £3,600 is to be imposed on annual contributions to a low cost pension scheme due to come into force in 2012, the Government has announced.

It said the limit would be high enough to allow a typical worker to build up a retirement income that equated to two-thirds of their salary.

Consumer campaign group Which? said it was disappointed that the limit was not higher, but welcomed the news that the cap would go up in line with earnings.

The proposed system of Personal Accounts will see millions of employees automatically placed into a workplace scheme.

Once enrolled, workers will contribute four per cent of their earnings, with savings topped up by three per cent from employers and one per cent in tax relief.

The Government had originally suggested an annual savings cap of £5,000 in a December White Paper.

But the pensions industry lobbied for the ceiling to come down, stating that a higher cap would damage existing pension provision and take the focus of Personal Accounts away from its target market of low and medium earners.

Age Concern director general Gordon Lishman said: "We warmly welcome the Government's announcement on Personal Accounts.

"These proposals will help hundreds of thousands of people without access to a decent pension to get a foot on the pensions ladder.

"The challenge for the Government is to get the detail right to make the scheme work for those on low incomes and carers who have gaps in their employment record."

Help the Aged policy manager Anna Pearson said: "Proposals for personal accounts are a good first step to encouraging people to save for their retirement.

"But in order to prevent pensioner poverty in the future, it is essential the Government looks at all the detail of how personal accounts will work to ensure it's worthwhile for everyone to save."

Pensioner poverty is rife in the UK - 21 per cent of senior citizens live in poverty, 11 per cent in severe poverty.