The policy paper looks at a number of recent changes to the pensions regime, including the restrictions on the annual allowance and lifetime allowance; the introduction of pensions flexibility; and the creation of secondary market for annuities. Alongside this it also examines the introduction of the savings allowance, the increase in ISA limits and the introduction of new ISA products which are supported by government top-ups.

The OBR says the combined effect has been to shift incentives in a way that makes pensions saving less attractive, particularly for higher earners, while non-pension savings becomes more attractive, often in ways that can most readily be taken up by the same higher earners.

Looking at the shorter term impact of the combination of pensions and savings taxation changes, the OBR says the biggest lifetime tax saving would be for individuals whose working-age earnings are taxed at the higher rate (40%), but whose retirement income would be taxed at the basic rate, which it reckons is likely to be the case for a significant proportion of the 4.4m individuals whose earnings are currently taxed at the higher rate.

The OBR points out that the system generates smaller, though still significant, tax savings for basic rate taxpayers whose income drops below the personal allowance in retirement (25%) and for additional rate taxpayers that drop to the higher rate (27%).

For individuals that stay in the same tax bracket, the savings are greater for those paying tax at higher marginal rates because the tax-free lump sum is worth more if it would otherwise have been taxed at 40% or 45%. However, it also points out that only individuals whose incomes are below the personal allowance in both their working life and retirement do not gain anything from the tax treatment of pensions saving.

It calculates that over the five-year periods covered in Budgets and Autumn Statements, the estimated yield from reducing generosity on private pensions slightly exceeds the estimated cost of increasing it for other savings.

However, the OBR notes that some of the private pensions measures – notably the March 2014 pensions flexibility measure – only brings forward receipts from the future, whereas the cost of some of the savings giveaways – in particular the savings allowance and higher ISA limits – will continue to rise over the long term.

Its central estimates suggest that the small net gain to the public finances from these measures over the medium-term forecast horizon becomes a small net cost in the long term.

The OBR states that ‘While the 0.11% of GDP steady-state cost is small relative to some of the demographic pressures on the public finances that we discuss in our fiscal sustainability reports, cumulated over a period of 50 years that small cost would add 3.7% of GDP to public sector net debt.’

The report concedes there is considerable uncertainty around the medium-term and longer term costings of these measures, but points out that if interest rates were to rise in the absence of a pick-up in earnings growth, then the long-term cost from these measures could be greater.

The OBR’s paper concludes: ‘As with any of our analysis of long-term pressures on the public finances, the relatively slow pace at which they would affect the public finances would allow future governments to adjust policy if they felt that was necessary. But the conclusions presented in this paper do show how the effect of decisions on the public finances over the medium term may be different over longer horizons.’

Private pensions and savings: the long term effect of recent policy measures is here.