Peter Mandelson, the new Business Secretary, is in line for a £1m pay-off and pension package from Brussels after serving just four years as Britain’s European Commissioner, as revealed in this morning’s Observer.

Mandelson is eligible for  payment in addition to an annual salary of £104,386 as a cabinet minister in the House of Lords, under the EU’s generous rules.

The generous deal will provoke severe criticism as all three main parties demand curbs on remunerations for bankers and City financiers.

 EU regulations rule that Mandelson, who left his job as Trade Commissioner last week before completing his five-year term, will be eligible for about £78,000 a year for each of the next three years in ‘transitional payments’. A total of £234,000 will be paid in instalments of £6,500 a month until the end of 2011. It will be subject to the preferential tax rates devised especially for EU officials.

Also when Mandelson reaches 65, he can look forward to a guaranteed EU pension based on his four-year’s service in Brussels which will start at £31,000 a year and will increase with the cost of living. Pensions experts said last night that to buy an income of that size would normally need a fund of around £750,000.

David Heathcoat-Amory, a Conservative member of the Commons European scrutiny committee, said Mandelson should refuse the payments. ‘It is not as if he has lost his job. He is moving into a government job with a good ministerial salary. If he takes this money, it will be a very bad example from a government that is criticising severance payments and City bonuses.’

Commission officials said that the fact that Mandelson had quit before the end of his five-year term in charge of EU trade policy made ‘no difference’ to any of his entitlements.  Any commissioner who has served more than three and fewer than five years can take 50 per cent of their £182,490 annual income for three years after leaving, so long as this sum and any income from new employment combined do not take their income over the level that they were earning as a commissioner. Mandelson, who rented a flat in Brussels but still owns a £2m property in Regent’s Park in London, can also apply to be reimbursed fully for all his removal costs.

The EU pay-off arrangement means that Mandelson will be earning almost exactly the same as the Prime Minister: whose current salary is £189,994. Matthew Elliott, the chief executive of the Taxpayers’ Alliance, said that the ‘vast amount’ Mandelson was earning was ‘totally inappropriate’. Pay-offs for EU commissioners showed the ‘massive divide between unaccountable people in power and the taxpayers who foot the bill’.

Mark Francois, the Tories’ spokesman on Europe, said: ‘Not only did Gordon Brown recall Peter Mandelson to shore up his own position, but it adds insult to injury to know taxpayers will have to pay extra for the privilege.’

The Prime Minister said 10 days ago that he wanted to recall Mandelson – who has twice resigned from cabinet posts in controversial circumstances – because he needed ‘the best team’ to help Britain through the global economic crisis.

In the House of Lords, where he will be able to claim a secretarial allowance of up to £70 a day, Mandelson will be in the company of other well remunerated former commissioners, including Lord Kinnock, who left Brussels after nine years with a transitional pay-off of about £277,000 over three years and a pension starting at £63,900 from the age of 65.

Last night a source close to Mandelson suggested he would take whatever he was entitled to, but stressed that he was unaware of the sums involved. “Mandelson does not know what he is entitled to. This calculation has not been made by the commission. No doubt he will be informed in due course.”

David Heathcoat-Amory, a Tory member of the Commons European scrutiny committee, said that Mr Mandelson should turn down the payments.

“It is not as if he has lost his job. He is moving into a government job with a good ministerial salary,” he said. “If he takes this money, it will be a very bad example.”

Matthew Elliott, the chief executive of the Taxpayers’ Alliance campaign group, said the “vast amount” Mr Mandelson would be paid was ”totally inappropriate”. He said the pay-offs showed the “massive divide between unaccountable people in power and the taxpayers who foot the bill”.