Revised personal pension contributions levels come into effect on Tuesday in the first step towards the introduction of a system of Personal Retirement Savings Accounts (PRSA), newstyle retirement funds for the self-employed.

The new maximum contribution level for self-employed and those in non-pensionable employment in the 30- to 39-year-old age bracket is 20 per cent of net relevant earnings, subject to an upper limit of £200,000. This compares to the previous maximum contribution level of 15 per cent. Those aged 40 to 49 may contribute 25 per cent, as opposed to 15 per cent, and 50- to 65-year-olds may put in 30 per cent, as opposed to 20 per cent, from the age of 55. Those in company pension schemes will not be affected.

Mr Owen Morton of Moneywise Financial Planning is extremely bullish on PRSAs, and believes the increased tax-deductible levels can greatly impact on pension expectations.

According to Mr Morton, a 40-year-old man earning £50,000 a year may increase his pension fund over 25 years from £1.4 million to £2 million under the new contribution levels. This assumes a very aggressive investment strategy where the man makes the maximum 25 per cent contribution between the ages of 40 to 49 and the maximum 30 per cent contribution between 50 and 65. It also assumes 8 per cent fund growth each year, and that the man's earnings and contributions rise by 5 per cent each year.

The new-style PRSAs are expected to have transfer rights, earlier access, ownership (and succession) rights, optional annuity-purchase structures and transparency on charges, says Mr Morton.

It is hoped PRSAs will be introduced in the Pensions Bill expected later this year.