Based on research by the National Institute of Economic and Social Research (NIESR), the ABI has found that, even if the
Government added up front 30% to contributions, over 20 years a move to a Pension ISA could:
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Lower savings by a sixth - resulting in an average annual reduction in contributions of £383 (see Notes for Eds.).
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Cut average wages by £1,284 per year.
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Increase the typical annual mortgage bill by £466.
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Reduce the size of the economy by around 6%.
A move to a Pension ISA would also create a fiscal deficit of over £5bn a year for future generations, according to Pensions Policy Institute research commissioned by the ABI. This is based on an upfront Government contribution of 30% and relates to pension tax revenue alone.
Taking into account the wider economic impacts and the effects that would have on tax receipts, the fiscal deficit would be even bigger – over £12bn a year within 20 years (based on NIESR estimate of a 1.9% reduction in tax receipts from switching from the current system to taxing contributions upfront).
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’.
“We do favour reform but a Savers’ Bonus will benefit 4 out of 5 workers without the wider impacts on the economy, wages and savings.”
The ABI is proposing an alternative radical reform, a ‘Savers’ Bonus’, or flat rate of pension tax relief. This would produce a simpler, fairer and more sustainable system for pension savings, and would encourage people to save more for retirement.
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