The potential pension ISA tax relief currently being considered by the government could lower savings by a sixth, according to research by the Association of British Insurers (ABI).
Based on calculations by the National Institute of Economic and Social Research, ABI found that along with 30% added contributions from the government, a move to a pension ISA over a 20 year period could:
- reduce average annual contributions by £383
- reduce average wages by £1,284 per year
- increase average annual mortgage bills by £466
- cut the size of the economy by 6%
In relation to the government’s 30% contribution and pension tax revenue, a move to a pension ISA could create a fiscal deficit of over £5bn a year for future generations.
Yvonne Braun, Director of Long Term Savings at the ABI said:
“The pension ISA would hit today’s savers and could create a fiscal time bomb for future generations. Many savers would be worse off and it would also damage the economy more widely because of its impact on saving and investment.
“It’s superficially attractive because of the savings it can deliver in the short term – but as the IFS have said, this is no more than a ‘temporary windfall’.
According to the Institute for Fiscal Studies (IFS) pensions are still the most tax-efficient form of saving money.
Favourable schemes for individuals to saving money are private pensions and workplace pension schemes such as auto-enrolment.
Tax treatments such as NICs relief as well as a 25% tax-free lump sum have proved beneficial for individuals – as an employee receives as much pension income as if they had saved in an ISA with only 70% of the cost in upfront income.