Our recent research in to how people plan to save for their retirement has found that cutting tax relief could lead to a pensions exodus in favour of ISAs if the Chancellor opts for a flat rate at next month’s Budget.

In anticipation of this, a third of the savers we polled said they would switch their contributions to an ISA, while just one in five people would continue to save into a pension at the same level if the higher rate tax relief was cut. Others said they would choose alternative investments, including property.

An announcement ending the 40 and 45% pension tax relief rates at next month’s Budget has been widely predicted since George Osborne launched a review into tax relief last year, with one option being to tax pensions like ISAs. This would see tax relief removed altogether, but a flat rate of tax relief has become increasingly likely.

Our research involved more than 2,000 savers across the UK as part of our long-running Tackling the Savings Gap study into the nation’s personal financial affairs.

We found that twice as many over 55s would favour an ISA versus a pension after a tax relief cut. Of those aged 18-24 who are just starting to save, 43% would put more into an ISA versus 32% who would stick with a pension.

Our Managing Partner, David Harrison, said: “Pensions are deeply unpopular, poorly understood and deny people access to their own money for decades. The only reason for choosing a pension is tax relief, which if cut, would dramatically reduce the appeal.

“ISAs are far more simple and popular but to be a viable alternative to a pension, the Chancellor would need to increase the annual allowance to at least £25,000 and provide an incentivising top-up on individuals’ contributions. If he wants to get rid of pension tax relief he needs to turbo-charge ISAs in this way.

“A flat rate of tax relief without enhancing ISAs is a watered down compromise that could actually make the Savings Gap worse and save far less for the Treasury than it wanted.”

We believe this new data from savers highlights the importance of financial planning and the understanding of new ways to adequately fund retirement. Rethinking our approach to long-term investing is paramount to finding the best solutions for savers.

Read more about our Savings Gap research >

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