Introducing a pension Isa could lower contributions by around a sixth, the Association of British Insurers (ABI) has warned today.
Using research prepared by the National Institute of Economic and Social Research (NIESR), the ABI has calculated that a pension Isa system, where pensions contributions are taxed but withdrawals are exempt, would influence people to cut their annual savings by £383 on average, even if government offered to add 30 per cent up front to the amount contributed.
A study commissioned by the ABI and conducted by the Pensions Policy Institute discovered that such a scheme would also create a deficit of at least £5bn a year.
"The pension Isa would hit today’s savers and could create a fiscal time bomb for future generations," cautioned Yvonne Braun, director of long term savings at the ABI. "Many savers would be worse off and it would also damage the economy more widely because of its impact on saving and investment."
Instead, the ABI favours a Savers' Bonus, also known as a flat rate of pensions tax relief.
Under the current system, withdrawals from pensions are subject to tax but contributions are exempt.
The pensions Isa and flat rate of relief are two of the possible reforms pension industry experts have suggested chancellor George Osborne could be preparing to unveil at next month's Budget.
The Treasury launched a consultation into pensions tax relief last July. In November's Autumn Statement, it was said that the results of this consultation would be announced in the next Budget.
Last week, Royal London boss Phil Loney launched an attack on the possibility of a pension Isa, remarking that those who advocated such a system were "clearly thinking too short term", just shortly after Royal London director of policy Steve Webb delivered a speech warning Osborne not to have a Gordon Brown moment by fiddling too much with the system.