Changes proposed to the UK tax system risk lowering pension contribution levels and damaging state finances, the government has been warned.

Research by the National Institute of Economic and Social Research (NISER) cautioned the government against shifting to a taxed-exempt-exempt (TEE) arrangement, claiming that the short-term increase in tax receipts would come at the expense of future income.

Commissioned by the Association of British Insurers (ABI), the think tank argued that the current exempt-exempt-taxed (EET) model had “superior” risk sharing properties.

It also questioned whether future governments could be deterred from taxing pensioner income even if the current government shifted to TEE.

Yvonne Brown, the ABI’s director of long-term saving, said the proposed model risked creating 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,” she said. 

Work commissioned by the ABI estimated that a shift to TEE would lower individual savings by one-sixth, and could reduce GDP output.

“It’s superficially attractive because of the savings it can deliver in the short term,” Brown added, emphasising that it was no more than a temporary windfall.

The changes were first proposed following the 2015 Summer Budget, but were criticised over the risk they would fail to address the current savings shortfall in the UK.

Chancellor of the Exchequer George Osborne is expected to announce his decision on tax changes in mid-March during the 2016 Budget.  

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